Understanding What’s Missing
The stock market it tied into the health of the economy, the level of the gross domestic product, and the stability of the banks. When one of these things suffers, all of them are guaranteed to feel the pinch in some way or another. The output gap is simply used to help economists determine whether they are living up to their full potential.
In economic terms, the output gap is used to evaluate the difference between the actual output of a country’s economy and the output that it could achieve if it was operating at its most efficient, or at full capacity. This gap can be considered either positive or negative, depending on whether the output is above or below the level that it is capable of when operating at its most efficient state. Unemployment and inflation often have a direct affect on which one is observed.
When market analysts spot an output gap, regardless of whether it is positive or negative, they interpret it to mean that the economy is running at an inefficient rate, usually because of overworking or under working available resources. Economic theory posits that a positive output gap leads to inflation because production and labor costs will rise.