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.
http://postimg.org/image/us371l9cz/
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…
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(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
https://www.google.ca/webhp?sourceid=chrome-instant&ion=1&espv=2&ie=UTF-8#q=output%20gap
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 !