What is the output gap?
The output gap is the difference between actual output and sustainable potential output.
Definition, calculation and mechanism
Potential output cannot be directly observed; it is estimated from labor, capital and productivity. A negative gap suggests spare capacity; a positive gap may indicate pressure. Models can disagree.
Interpretation, examples and limits
It informs monetary and fiscal policy, but estimates are revised. One strong quarter does not prove sustained overheating. Interpret it alongside inflation and employment.
Related topics
What is income distribution?What are open market operations?What is a budget deficit?What is asset allocation?What is purchasing power?What is the consumer price index?What is a central bank?What is market capitalization?What is a dividend?What is the trade balance?What is Bitcoin?What is an exchange rate?What is the real effective exchange rate?What is a recession?What is an exchange-traded fund?What is a Treasury bill?What is portfolio diversification?What are reserve requirements?What is a bond?EconomicsWhat is an initial public offering?What is the real interest rate?What is bank capital?What is core inflation?What is an investment fund?What is an investment management fee?What is deflation?What is an indirect tax?What is a stock exchange?What is public debt?What is the labor force participation rate?What are foreign exchange reserves?What is a tariff?What are exports?What is money supply?What is an altcoin?What is economic growth?What is the relationship between risk and return?What is an investment time horizon?CreditHow do you calculate the cost of a loan?What is bank liquidity risk?What is portfolio rebalancing?What is an emergency fund?What is fiscal policy?What is the employment rate?What is financial literacy?What is liquidity?What is a bank deposit?What is gross domestic product (GDP)?