![]() As a result, slack and the output gap are rarely out of economic debates. To make matters even more tricky, estimates of potential output are often the most uncertain for the period that interests central bankers the most: the recent past and present. Consequently, they get different results. This happens when demand is very high and the economy is operating above what it can sustainably maintain.īeing a theoretical concept, potential output cannot be measured directly and experts use different methodologies to estimate it. If the actual output is higher than the potential output, economists talk about a positive output gap. This happens when there is spare capacity, or slack, in the economy. If it is lower, economists talk about a negative output gap. Potential output is a concept that refers to the amount of goods and services that an economy is capable of producing when its resources, such as the workforce, equipment, infrastructure, and technology, are used in an efficient way that can be sustained over time.Īctual output can be lower or higher than potential output. Actual output is measured by gross domestic product. To measure it, economists often use the output gap, which is the difference between what is actually being produced in an economy (actual output) and what it has the capacity to produce (potential output). There are significant challenges in measuring slack, which is one reason why the concept is often discussed in economic debates. Raising interest rates too early could hurt an economic recovery but doing so too late could result in higher inflation. The timing of such a policy move is crucial. It is one of the factors that can help the central bank make monetary policy decisions – when to raise or cut interest rates. The amount of slack therefore provides information about current and future inflationary pressures in the economy. For the central bank, this means that it is probably time to raise interest rates to keep prices stable. As a result, sharper price increases can be expected. ![]() It becomes difficult to find new employees and producers need to raise wages in order to keep existing ones. The economy is about to hit its full capacity. The central bank may even consider providing stimulus to the economy, for example by cutting interest rates or using non-standard measures, to prevent inflation from falling too low for too long or even deflation kicking in.Īfter a while, however, as employment picks up and companies produce more, slack starts to disappear. As a result, there is no danger of inflation getting out of control, so for the central bank it might mean that it can keep interest rates unchanged. This in turn means that they do not need to raise the prices of their products to cover higher wage costs. Even if the economy starts growing, there is still little pressure on producers at that stage to raise wages. If there is a large amount of slack in the economy it tends to mean many people are looking for a job. This is why economists want to keep track of it as it can give important signals about what is happening in the economy. The reason that slack exists is usually due to insufficient demand relative to what the economy is capable of producing. Machines left idle in a factory or people who cannot find a job represent slack to an economist. If registration fees need to be passed onto (split with) the registrant regardless of registration type, please contact your account manager.Economic slack is a phrase used to describe the amount of resources in the economy that are not used. Note: Changes can take up to 5 minutes. Fees from internal registrations will be absorbed by the organization by default. The average 12-month stock forecast according to 23 Wall Street analysts is 28.95, this represents an 8.94 increase on the current price of 26.58.
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