Output gap: what it means

The difference between what the economy is actually producing and an estimate of what it could produce sustainably. It cannot be measured directly.

The output gap is the difference between actual GDP and potential output, the level of production the economy could sustain without pushing inflation up or down. A positive gap means the economy is running above capacity; a negative gap means there is spare capacity.

Why it matters when checking a claim

• It is estimated, not observed. Potential output has to be inferred from surveys, employment and other indicators. The OBR, Bank of England and international bodies such as the IMF and OECD each publish their own estimates, which can differ in size and even in sign.
• It feeds into other figures. The structural deficit depends on the output gap, so a revised gap changes structural borrowing too.
• Revisions are common. Estimates for past years are often changed substantially as more data arrive.

The OBR explains its method and publishes its estimate with each economic and fiscal outlook.

Also searched as: potential output, spare capacity, output gap meaning, positive output gap, negative output gap

Official definitions: Office for Budget Responsibility: Potential output and the output gap · Office for Budget Responsibility: Economic and fiscal outlook

Questions that use this term

• How big is the UK economy (GDP)?
• Is the UK in recession?

Related terms

• Structural deficit: The part of government borrowing that would remain even if the economy were running at its normal capacity. Also called the cyclically adjusted deficit.
• Productivity: How much output the economy produces for each unit of input. The ONS headline measure is output per hour worked.
• Nominal GDP: Gross domestic product measured at current prices, without adjusting for inflation. Used for debt-to-GDP and spending-to-GDP ratios.
• Revisions: Changes to previously published figures, made when more complete data, improved methods or updated seasonal factors become available. A normal part of official statistics.

More inflation, prices and the economy terms: CPI (Consumer Prices Index) · CPIH · RPI (Retail Prices Index) · Core inflation · Nominal GDP · Chained volume measure · Purchasing power parity (PPP) · Bank Rate · Quantitative easing (QE) · Quantitative tightening (QT) · GDP deflator · Productivity.