Output Gap

Output Gap

In economics, the output gap is the difference between an economy’s actual output and the output it is estimated it could produce at full employment, also called potential output. If strong demand justifies it, economies (i.e. factories and workers) can operate above potential in which case there would be a positive output gap. If, on the contrary, poor demand means there is unfilled capacity, the output gap will be negative. The output gap (as a manifestation of supply/demand balance) is a key indicator of inflationary pressure, which in turn is a driver of monetary and fiscal policy action.

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