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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