Output gaps — Edexcel A-Level Economics A
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Output gaps explained
An output gap is the difference between actual real GDP and the economy's productive potential, shown on an AD/AS diagram by the position of short-run equilibrium relative to the long-run aggregate supply (LRAS) curve.
Read the full explanation
Draw real GDP on the horizontal axis and the price level on the vertical axis. A vertical LRAS at potential output marks full capacity. If short-run equilibrium, where AD meets SRAS, lies to the left of LRAS, actual output is below potential: a negative output gap with spare capacity, so unemployed resources and downward pressure on prices and costs. If equilibrium lies to the right of LRAS, actual output exceeds potential: a positive output gap, with resources used beyond normal capacity and upward pressure on the price level. The size of the gap is the horizontal distance between equilibrium real GDP and LRAS.
Your focus
- Draw an AD/AS diagram with correctly labelled axes, a vertical LRAS, and intersecting AD and SRAS curves.
- Identify and label a negative output gap as equilibrium real GDP below LRAS, and a positive output gap as equilibrium real GDP above LRAS.
- Explain how the size of the output gap is measured and what it implies about spare capacity in the economy.
Output gaps exam tips
Marking Points
- Identifies the horizontal axis as real GDP (or real output) and the vertical axis as the price level.
- States that LRAS is drawn vertical at the economy's productive potential (full-capacity output).
- Locates short-run equilibrium where AD intersects SRAS.
- Defines a negative output gap as equilibrium real GDP below LRAS, giving spare capacity.
- Defines a positive output gap as equilibrium real GDP above LRAS, with resources used beyond normal capacity.
- Measures the gap as the horizontal distance between equilibrium real GDP and the LRAS level.
Examiner Tips
- 💡Sketch the axes and the vertical LRAS first, then add AD and SRAS so the equilibrium position is deliberate rather than accidental.
- 💡Annotate the gap with a labelled horizontal arrow between equilibrium real GDP and LRAS, and state whether it is negative or positive.
- 💡Link the diagram to consequences: a negative gap implies spare capacity and downward pressure on the price level; a positive gap implies upward pressure.
Common Mistakes
- Confusing an output gap with the price-level difference: the gap is measured horizontally in real GDP, not vertically in prices; correct by measuring the distance along the real GDP axis.
- Treating LRAS as upward sloping like SRAS: LRAS is vertical at potential output; correct by drawing it as a vertical line at full-capacity real GDP.
- Assuming any equilibrium left of LRAS means falling real GDP: it means output below potential, which can persist while GDP grows; correct by comparing actual with potential, not with last year's GDP.
- Labelling a positive output gap as spare capacity: spare capacity belongs to a negative gap; correct by matching below-potential output with unused resources.