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Topic Videos

Output Gap and the Economic Cycle

AS, A-Level
AQA, Edexcel, OCR, IB, Eduqas, WJEC

Last updated 2 Dec 2020

This updated video explores the concept and measurement of the output gap using AD-AS analysis and UK economic data.

What is the output gap?

  • The output gap is the difference between the actual level of GDP and its estimated potential level.
  • The output gap is usually measured as a percentage of the level of potential output.

Negative output gap

  • When actual GDP is less than potential GDP
  • Some factor resources are under-utilized e.g. there is some demand-deficient unemployment in labour market
  • Main problem is likely to be rising unemployment and possible deflation risk

Positive output gap

  • Actual GDP is greater than the estimated potential GDP
  • Some resources are working beyond their usual capacity (e.g. extra shift work & overtime)
  • Main problem is rising demand-pull and cost-push inflationary pressures

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