The formula to calculate the Output Gap (OG) is:
\[ OG = \frac{Y - Y^*}{Y^*} \]
Where:
An output gap is an economic indicator that measures the difference between the actual output of an economy and its potential output. Potential output refers to the maximum amount of goods and services an economy can produce when it is fully utilizing all available resources, including labor and capital. A negative output gap indicates underperformance or recession, while a positive output gap indicates overheating or inflationary pressure in the economy.
Let's consider an example:
Using the formula to calculate the Output Gap:
\[ OG = \frac{1000 - 1200}{1200} = \frac{-200}{1200} = -0.1667 \approx -16.67\% \]
This means that the economy is operating at approximately 16.67% below its potential output, indicating a negative output gap.
