Output Gap

The output gap measures the difference between what an economy is actually producing (its real GDP) and what it could produce at full capacity (its potential GDP). If the economy is producing more than its sustainable capacity, the output gap is positive, often leading to inflation. If it's producing less, the gap is negative, indicating unused resources and higher unemployment. Think of it as the health of the economy: a positive gap suggests overheating, while a negative gap indicates underperformance. Governments and policymakers use this information to adjust economic policies to promote stable growth.