Output gap

What it means

The difference between actual and potential output, as a percentage of potential.

The exam angle

A positive gap signals inflationary pressure. Potential output is estimated, so the gap is revised heavily after the fact.

Where it appears in the syllabus

• EconomicsCFA Level I · exam weight 6–9% · Market structures, business cycles, policy, trade and exchange rates.

Related terms

• Adverse selectionThe problem that arises when the party with better information self-selects into a transaction, leaving the…
• Business cycleThe recurring pattern of expansion, peak, contraction and trough in economic activity.
• Core inflationInflation excluding food and energy prices, which are volatile and often driven by supply rather than demand.
• Fiscal policyGovernment use of spending and taxation to influence aggregate demand.
• Gross domestic productThe market value of all final goods and services produced within a country in a period.
• InflationA sustained rise in the general price level, reducing the purchasing power of money.