Output Gap

Would someone explain me why the CFA says that a positive output gap opens in time of recession or slowdown. I thought it was the inverse.


Just keep in mind that the definition of the gap is trend GBP minus actual GBP. When there is a positive output gap you are below trend.

It is like your bank calling you and saying you have a nice positive overdraft of 1000$. It is a negative thing stated as a positive figure. The positive overdraft is a negative balance. The negative overdraft if a positive balance ( - ) x ( - ) = ( +)

Just a bit twisted…

(of course you don’t talk about negative overdrafts. I am just trying some silly comparisons)

Bear - let me tell you i was going insane with this topic too when i first came across it. I dont have the book on me but the way it was described, common sense, and even the formula (again, if i recall correctly) all made it seem like actual GDP - trend.

This is not what it is said on most websites


Same thing here. I’m kind of loss ! frown


Yeap it looks like the CFA definition is not the same as the one we found on specialised websites.

Because my brain was blank on the topic and I am more open to new definitions in English than you guys (no preset as I am not a native speaker) I could easily take it as it was presented

thats basic economics, ive never seen it written otherwise. You need to follow the syllabus though so commit to memory Y* -Y instead of any prelearned formula

Output gap = Long term / Potential GDP - Actual GDP

During recessions actual GDP will be < potential, resulting in positive output gap.

Remember the goal is to write and pass these exams

Thanks all !