2.5.2 output gaps

Question 1

actual growth

Answer 1

the increase in real output (real GDP) of an economy over time

Question 2

what is actual growth the same as

Answer 2

short run economic growth

Question 3

potential growth

Answer 3

the rate at which an economy could grow if it used all its resources were used efficiently (land, labour, capital etc) - full productive capacity

Question 4

what is potential growth the same as

Answer 4

long run economic growth

Question 5

export-led growth

Answer 5

when a country focuses on producing goods and services for foreign markets rather than relying mainly on domestic demand

Question 6

trend growth on the trade cycle

Answer 6

the average rate of potential growth over 10-20 years

Question 7

positive output gaps

Answer 7

occurs when actual output is greater than potential output

Question 8

what does a positive output gap imply

Answer 8

the economy is overheating - resources (like land and capital) are being used beyond sustainable levels

Question 9

disadvantages of positive output gaps

Answer 9

FoP over utilised, excess demand in economy, main problem will be rising demand-push and cost-pull inflation

Question 10

negative output gaps

Answer 10

occurs when actual output is less than potential growth

Question 11

what does a negative output gap imply

Answer 11

economy is underperforming, with unused resources (spare capacity) due to weak aggregate demand

Question 12

disadvantages of negative output gaps

Answer 12

weak demand suggests there is demand deficient unemployment. may also be a risk of deflation if AD is falling too much

Question 13

what is on the axis of the trade cycle graph

Answer 13

y axis = real gdp
x axis = time

Question 14

what is an output gap

Answer 14

the difference between the actual level of real GDP and its estimated long-term value at a point in time

Question 15

AS and AD diagram showing output gaps - axis

Answer 15

PL on y axis and real output on x axis

Question 16

positive output gaps on an AS/AD diagram

Answer 16

LR equilibrium output is lower than the SR equilibrium, output gap is Y1 to Y2

Question 17

difficulty of measurement of output gaps

Answer 17

-hard to predict max possible output of an economy, economists often have to guess
-published actual GDP figures are often revised/updated months or years after their publication
-poorer countries often dont have organisations to report GDP figures so reported figures may be inaccurate

Question 18

negative output gaps

Answer 18

LR equilibrium output is higher than SR equilibrium output, output gap is Y1 to Y2