Actual Output

Definition

Actual output refers to the real-world level of production or economic activity that is achieved in an economy, as opposed to the potential or ideal level of output. It is a key concept in the Aggregate Demand/Aggregate Supply (AD/AS) model, which analyzes how actual output is determined and how it relates to growth, unemployment, and inflation.

5 Must Know Facts For Your Next Test

1. Actual output is the real-world level of production achieved in an economy, as opposed to the potential or ideal level of output.
2. The difference between actual output and potential output is known as the output gap, which can be positive (actual output exceeds potential) or negative (actual output falls short of potential).
3. Actual output is a key variable in the AD/AS model, as it reflects the overall level of economic activity and is influenced by changes in aggregate demand and aggregate supply.
4. When actual output is below potential output, it indicates the economy is operating with spare capacity and experiencing unemployment, which can lead to downward pressure on inflation.
5. Conversely, when actual output exceeds potential output, it signals the economy is operating at or beyond its capacity, which can lead to upward pressure on inflation.

Review Questions

• Explain how actual output is determined in the AD/AS model.
  • In the AD/AS model, actual output is determined by the intersection of the aggregate demand (AD) and aggregate supply (AS) curves. The AD curve represents the total demand for goods and services in the economy, while the AS curve represents the total supply of goods and services. The point where these two curves intersect determines the equilibrium level of output, which is the actual output achieved in the economy.
• Describe the relationship between actual output, potential output, and the output gap.
  • The output gap is the difference between actual output and potential output. If actual output is less than potential output, the economy is operating below its capacity, and there is a negative output gap, which indicates the presence of unemployment and unused resources. Conversely, if actual output exceeds potential output, the economy is operating above its capacity, and there is a positive output gap, which can lead to inflationary pressures.
• Analyze how changes in aggregate demand and aggregate supply can affect actual output, unemployment, and inflation in the AD/AS model.
  • In the AD/AS model, changes in aggregate demand or aggregate supply can lead to changes in actual output, which in turn can impact unemployment and inflation. For example, an increase in aggregate demand will shift the AD curve to the right, leading to a higher equilibrium level of output. This can result in a positive output gap, causing a decline in unemployment but an increase in inflationary pressures. Conversely, a decrease in aggregate supply will shift the AS curve to the left, leading to a lower equilibrium level of output, a negative output gap, and a rise in both unemployment and inflation.

Related terms

Potential Output: The maximum level of output an economy can sustain over the long run given its available resources and technology, without causing inflation to rise.

Output Gap: The difference between actual output and potential output, which indicates whether an economy is operating below or above its capacity.

Aggregate Demand (AD): The total demand for all goods and services in an economy at a given price level and time period.