Output Gap


DEFINITION of 'Output Gap'

An economic measure of the difference between the actual output of an economy and the output it could achieve when it is most efficient, or at full capacity. There are two types of output gaps: positive and negative. A positive output gap occurs when actual output is more than the full-capacity output. Negative output gap occurs when actual output is less than full-capacity output.


The measure compares the actual GDP (output) of an economy and the potential GDP (efficient output). When the economy is running an output gap, either positive or negative, it is thought to be running at an inefficient rate as the economy is either overworking or underworking its resources. Economic theory suggests that positive output gap will lead to inflation as production and labor costs rise.

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  1. What is GDP and why is it so important to investors?

    The gross domestic product (GDP) is one of the primary indicators used to gauge the health of a country's economy. It represents ... Read Full Answer >>
  2. Is Colombia an emerging market economy?

    Colombia meets the criteria of an emerging market economy. The South American country has a much lower gross domestic product, ... Read Full Answer >>
  3. Is Mexico an emerging market economy?

    Mexico meets all the criteria of an emerging market economy. The country's gross domestic product, or GDP, per capita beats ... Read Full Answer >>
  4. Is Argentina a developed country?

    Argentina is not a developed country. It has one of the strongest economies in South America or Central America and ranks ... Read Full Answer >>
  5. Is Brazil a developed country?

    Brazil is not a developed country. Though it has the largest economy in South America or Central America, Brazil is still ... Read Full Answer >>
  6. Are Social Security payments included in the US GDP calculation?

    Social Security payments are not included in the U.S. definition of the gross domestic product (GDP). Transfer Payments For ... Read Full Answer >>

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