1. What is GDP Gap?

The GDP gap measures the difference between an economy's actual and potential output. In the UK context, it represents the amount by which the economy is underperforming (negative gap) or overperforming (positive gap) relative to its potential.

2. How Does the Calculator Work?

The calculator uses the GDP gap formula:

Where:

• Potential GDP — The maximum sustainable output of the economy (GBP)
• Actual GDP — The current output of the economy (GBP)

Explanation: A positive gap indicates the economy is operating below potential (output gap), while a negative gap suggests overheating.

3. Importance of GDP Gap Calculation

Details: The GDP gap is crucial for economic policy-making, helping the Bank of England assess inflationary pressures and guide monetary policy decisions.

4. Using the Calculator

Tips: Enter both potential and actual GDP figures in GBP (billions). The calculator will show the difference between these two values.

5. Frequently Asked Questions (FAQ)

Q1: What's a typical GDP gap for the UK?
A: The UK output gap typically ranges between -2% to +2% of potential GDP in stable periods.

Q2: How is potential GDP estimated?
A: Potential GDP is estimated using statistical techniques that account for labor, capital, and productivity trends.

Q3: What causes a positive GDP gap?
A: Positive gaps occur during recessions when resources (labor/capital) are underutilized.

Q4: What does a negative gap indicate?
A: Negative gaps suggest the economy is operating above sustainable capacity, often leading to inflation.

Q5: How often is the UK GDP gap measured?
A: The Office for Budget Responsibility publishes estimates quarterly alongside GDP data.