Output Gaps

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Output Gap
How much spare capacity does an economy have to meet a rise in demand?
- Output Gap
Negative output gap- downward pressure on inflation
- Is actual GDP Potential GDP means some resources are working beyond their normal capacity e.g. overtime
  - The main issue is likely to cause a acceleration in demand-pull and cost-push inflation
    - Countries where an economy is over-heating because of fast and rising demand e.g China and India.
High unemployment, have a excess supply of labour cause pressure on real wage rate
- Actual GDP< Potential GDP. Not all factors of production fully utilized.
  - Negative output gap- downward pressure on inflation
    - Is actual GDP Potential GDP means some resources are working beyond their normal capacity e.g. overtime
      - The main issue is likely to cause a acceleration in demand-pull and cost-push inflation
        Countries where an economy is over-heating because of fast and rising demand e.g China and India.
- Recently we have had millions of people accepting lower pay rises or had wages frozen or cut as businesses have huge pressure to control costs.

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