Output Gap

Output gap means the difference between actual economic output and the economy’s potential output. In simple terms, it shows whether the economy is running above or below its normal capacity. Output gap is important because it can affect inflation and unemployment. A positive output gap may create inflation pressure, while a negative output gap may signal weak demand and unused resources. For example, if actual GDP is below potential GDP, the economy may have a negative output gap. Output gap is not directly observed. Economists estimate it using models, and estimates can change.