Output Gaps content slideshow. Designed for the Economic A level qualification. Can be used in revision and in class. Subtopics Short Run Output Gaps Long Run Output Gaps

1. Output Gaps
Lower 6th Macro
National Income

2. Short Run
Output Gaps
Output Gaps
Mr O’Grady

3. Output Gaps
Potential Output (YFE): The level of output an economy can produce sustainably into the
long run
Output Gaps: the difference between the actual level of national output (Y) and the
potential level of output when all resources are fully employed (YFE)
Negative output gap: actual GDP < potential GDP
Positive output gap: actual GDP > potential GDP
Short run Output Gaps: the difference between actual
output, Y, at SR equilibrium and potential output, YFE
Y is shown at AS-SRAS intersection
YFE would be shown at the output of Classical LRAS/Keynesian
LRAS vertical section
Can be either negative or positive
Key Question: How can there be a positive output gap?
Potential output shows how much an economy can produce
sustainably into the long run
It is therefore temporarily possible to produce above YFE, if we
overwork our resources beyond their sustainable level
SRAS H
SRAS L
RNO
Price
Level
YFE
YH
YL
-ve
Output Gap
+ve
Output Gap
AD H
AD L

4. Long Run
Output Gaps
Output Gaps
Mr O’Grady

5. Long run Output Gaps: the difference between actual
output, Y, at LR equilibrium and potential output, YFE
Y is shown at AS-LRAS intersection
YFE is seen along the vertical section of the Keynesian LRAS
Can only be negative, as output cannot exceed potential
into the long run, even if AD is high
However: Long run output gaps only occur in
Keynesian model of LRAS
The Classical model assumes full flexibility of factor input
prices in the long run
This means that resource markets always clear and there
are no unemployed or under-utilised resources whether
AD is high or low
LRAS
RNO
Price
Level
YFE
YL
-ve
Output Gap
AD H
AD L
LRAS
RNO
Price
Level
Y=YFE
AD L
AD H

6. Where next?
Don’t forget to SUBSCRIBE!
Visit our website: www.smootheconomics.co.uk
Find more resources, extension materials,
details of courses, competitions, and more!
Follow our socials:
Instagram: @smootheconomics
Twitter: @SmoothEconomics
Facebook: @SmoothEconomics