Output Gap
The output gap is the difference between the observed level of gross domestic product (GDP) and the estimated level of an economy's potential GDP, i.e., the difference between what the economy is producing and what it would produce if it were operating at full capacity.
If the country's production level (observed GDP) exceeds its potential level, the output gap would be positive, and inflationary pressures would be generated on the demand side. If, on the other hand, the country's production level is lower than its potential level, the output gap would be negative, which denotes excess installed capacity (idle capacity) and suggests that there are no inflationary pressures on the demand side.
It should be noted that the output gap, like potential GDP, is an estimate and not data-observed or officially published by an economic authority or statistical institute. For their estimation, the authorities can use all available information, such as surveys, labor market and foreign trade indicators, and gross capital formation, among others.
