Output gap

The term output gap (also output gap, output gap) denotes the deviation of the realized gross domestic product ( GDP) from potential output (PP). If this gap is reduced, economic resources are used efficiently within its capacity (full capacity ). When there is a positive or negative difference, ie resources (labor, capital ) are not properly used or beyond their capacity (revision) are exploited, the gap is larger. It follows, in theory, that the prices of factors of production to rise despite low productivity and it leads to inflation.

Importance

This gap includes the unused capacity of an economic area. Originally, the term comes from the economic theories of business cycles.

The central banks determine the value of the output gap, inter alia in speculative bubbles. However, the output gap also plays just like the real interest rate, inflation expectations and the difference between current inflation rate and target rate, for the alignment of the interest rate policy a role. Imperfect competition in the markets are considered the main cause for the development of a production gap. This applies to both the labor and the capital market and each in conjunction with a rigid price and wage bond.

The output gap is usually stated as a percentage of the potential value of an economy. From a negative output gap is called when the current gross domestic product ( GDP) is below the potential GDP. This then has the following effects:

• Decreasing inflation rate,

• Rising unemployment

• Decreasing imports

Consequently, a positive output gap has a reverse effect. The output gap is based on the potential value of an economy, so that superficially the normal capacity shall be determined on the basis of statistical data of a country.

The graph shows the negative output gap, which occurs when an economy operates with unemployment resources and an output gap "ab" has. The problem of the negative output gap could be unemployment.

A positive output gap occurs when the actual output of an economy is higher than their potential output. This seems impossible, and in fact an economy can no longer produce produce than allow the productive capacities. For a short while, but it is possible, namely, when the workers work overtime, some workers that are not normally available in the work process, they enter and the machines are utilized to the maximum. In the long term, this condition is not preserved, unless the AS ( aggregate supply ) increases. The graph above shows the positive output gap and an increase in AD ( Aggregate Demand), which causes an increase of the AS, which is above the potential output and the price increase from P to P1. In fact, experience countries with positive output back often a strong inflation.

Calculation

The calculation of the output gap x is as follows: where Y * indicates the potential output and Y is the realized GDP. Thus, in a positive output gap is the current output above potential, which may be in growing economies. One can also define a relative output gap. This is calculated as

The output gap is also used to calculate the economic government deficit, which in the context of the debt brake ( Germany ) is permitted.

Okunsches law

The Okun's law is called a rule for the empirical relationship between cyclical unemployment and the output gap: A cyclical unemployment of 1 % of an output gap equal to about 2% of potential GDP. If therefore corresponds to approximately full employment unemployment rate of 6% and the actually observed unemployment rate is 8%, the output gap is equal to 4%. It follows that a reduction in the cyclical unemployment rate by one percentage requires an increase of GDP by two percent.

The Okun's law describes the empirical correlation between unemployment and the output gap and explains no causal law. That means, the business cycle, GDP fluctuates more than the unemployment rate. During a recession, companies in their number of employees fit theoretically not completely to the lower production volumes, as they seek to avoid the loss company-specific know-how. On the other hand, try the farms, during good times, to increase production only through overtime of existing employees to avoid hiring additional employees.