Output Gap

spare capacity

for a whole economy this exists when LRAS is greater than AD and so there is a negative output gap

problems

size of output gap isn't easy to estimate economists don't know the exact position of LRAS curve initial estimates of GDP show where SRAS and demand are equal

output gap

the difference between the actual level of GDP and the productive potential of an economy

hysteresis

the process whereby a variable does not return to its former value when changed, e.g. an economy failing to return to its former long term trend rate of growth after a severe recession

costs of output lost

unemployed lose income fixed incomes suffer in boom if inflation rises deep recession, economies do not bounce back to previous level (hysteresis)

positive output gap

when actual GDP is above the productive potential of the economy and it is in boom

negative output gap

when actual GDP is below the productive potential of the economy