Output Gap
The output gap is the difference between actual real GDP and potential (full capacity) output. Positive gap (actual above potential) indicates the economy is overheating; negative gap indicates spare capacity and underutilisation. The output gap influences inflation and unemployment.
Real World
In 2009, the UK had a negative output gap of around 5–6% of GDP following the financial crisis, meaning factories and offices sat idle while unemployment rose to 8%, giving the Bank of England room to cut interest rates to 0.5%.
Exam Focus
Use output gap diagrams showing actual vs potential GDP on a PPF or AD/AS model — visual analysis earns application marks.
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