# Output Gap mistake?

Page 54, CFAI volume 3 states : output gap is the diff b/w potential and actual GDP. A positive gap opens in times of recession or slow growth. WTF? Every site and piece of literature i have ever read says the calculation is actual - potential, and a positive gap is inflationary versus a negative gap which is deflationary, or recessionary. Also I’m confused by the inventory cycle discussion. In the top paragraph it says inventories increasing is positive, and that they cut inventory in a slowdown… then right below that it says “when the inventory to sales ratio has moved down, the economy is likely to be strong in the next few quarters as business try to rebuild inventory”. Uhhh… if inventory/sales is declining, is that not bearish?

Last sentence makes sense, when economy is strong, sales will be strong and therefore ratio of inventory to sales will be low - but here you are looking at the ratio If businesses expect sales to improve, they will prepare for increased sale with inventory – so on an absolute basis inventory goes up in anticipation That’s what I make of it

Hi, anyone has an answer for this? Most of the sites show that Output gap = Actual - Potential, while CFAI says Potential- Actual, anyone can help here?

GDP(actual) - GDP(potential)

source: Wikipedia

CFAI simply reversed the equation.

When there is a recession, GDP is obviously below pontential.

Based on CFA: Potential (which is higher) - Actual (which is lower) yields a positive value during a recession, so correct.

Based on your other readings they use the equation: Actual (which is lower) - Potential (which is higher), this would yield a negative value during recessionary periods. A positive value in this instance would mean actual gdp higher than potential indicated a potentially over heated economy where inflation is probably present.

JUST KNOW that if current GDP is largely below actual GDP, then you are pobably in a recessionary environment, and thus experiencing an output gap.