Short-Term Economic Fluctuations - Output gaps and cyclical unemployment - Potential output and the output gap
3 important questions on Short-Term Economic Fluctuations - Output gaps and cyclical unemployment - Potential output and the output gap
Potential output, also called potential GDP or full-employment output, is:
The amount of output (real GDP) that an economy can produce when using its resources, such as capital and labour, at normal rates, defined as Y*. Potential output is not a fixed number but grows over time, reflecting increases in both the amounts of available capital and labour and their productivity.
Short-term economic fluctuations can be caused by:
- Changes in the rate of growth of potential output
- Actual output does not always equal potential output, this difference is the output gap.
A recessionary gap is:
A positive output gap, which occurs when potential output exceeds actual output (Y* > Y)
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