How much spare capacity does an economy have to meet a rise in demand? How close is an economy to operating at its productive potential? Has the recession damaged the economy’s productive potential? These sorts of questions all link to an important concept – the output gap. The output gap is the difference between the actual level of national output and the estimated potential level and is usually expressed as a percentage of the level of potential output.

Negative output gap – downward pressure on inflation

If actual GDP is less than potential GDP there is a negative output gap. Some factor resources such as labour and capital machinery are under-utilized and the main problem is likely to be higher than average unemployment.

A rising number of people out of work indicate an excess supply of labour, which causes pressure on real wage rates. We have seen millions of people in the labour market have to accept lower pay rises in recent years, many have seen wage freezes or actual wage cuts at a time when businesses have been under huge pressure to control their costs.

Data from Timetric.

To view this graph, please install Adobe Flash Player.

OECD Economic Outlook Database (version 88) from Timetric

Positive output gap – upward pressure on inflation

• If actual GDP is greater than potential GDP then there is a positive output gap.
• Some resources including labour are likely to be working beyond their normal capacity e.g. making extra use of shift work and overtime.
• The main problem is likely to be an acceleration of demand-pull and cost-push inflation.
• A positive output gap is associated with countries where an economy is over-heating because of fast and rising demand - a good example of this might be countries such as India and China

 

Featured
CPD courses

Economics Teachers National Conference 2015

Our popular Economics Teacher National Conference takes place on Monday 22 June 2015 at the superb Wellcome Collection Auditorium on Euston Road in Central London. This is the leading enrichment CPD event for Economics teachers in the UK and always attracts a good number of teaching colleagues from further afield too!Confirmed speaker line-up:Duncan Weldon - BBC Newsnight Economics Correspondent (Economic Policy after the Election)Sir Paul Collier, Oxford University - Where next for Development Economics?Adrian Woolridge (The Economist) - The Great DisruptionDavid Smith (Economics Editor of the Sunday Times) Prospects for the UK EconomyOur delegate prices are:Single Delegate - £175 per personDepartment Deal - £125 per person (for two or more colleagues attending from the same school or college)PGCE / NQT - £75 per person

Learn more ›

Teaching & learning products

AS Macroeconomics Revision Guide

This 44-page, full-colour printed revision guide is designed to support students preparing for their AS Economics exams on macroeconomics. tutor2u's Geoff Riley provides comprehensive coverage of all the core macroeconomic topics for AS Economics

£4.00

Edexcel A2 Economics Worked Answers (2014)

Example A Grade answers to the Edexcel Unit 3 and Unit 4 exam papers sat in June 2014

£5.00