The difference between positive and negative output gaps
An output gap measures how far actual output is from the economy's full-capacity level. A positive gap means the economy is overheating. A negative gap means it is underperforming.
Formula
Output Gap = Actual GDP − Potential GDP
Real World
During the UK's post-2008 recession, actual GDP fell well below potential GDP, creating a large negative output gap — unemployment rose and factories ran below capacity for years.
Exam Focus
State whether the gap is positive or negative and link it explicitly to inflationary or deflationary pressure to secure full marks.
Price Elasticity of Demand
PED = % change in quantity demanded ÷ % change in price
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