One methods of estimating potential GDP is theHodrick-Prescottfilter: This is the application of statistical techniques that differentiate between the short-term ups and downs and the long-term trend. The Hodrick-Prescott filter is one popular technique for separating the short from the long term.

"Capacity utilization" is another measure of potential output.

The capacity utilization rate measures the proportion of potential economic output that is actually realized. Displayed as a percentage, the capacity utilization level provides insight into the overall slack that is in an economy or a firm at a given point in time. The formulafor finding the rate is:

(Actual Output / Potential Output ) x 100 = Capacity Utilization Rate

What are some signs in the economy that there is a positive output gap?

Take a look at the diagram below. For a person who does not know economics, can it be explained by referring to the various parts of the graph how and why this situation is known as an inflationary gap?

Cerdance www.cerdako.com Long-run Short-run aggregate supply aggregate supply Inflationary Price Level gap Inflationary gap Aggregate demand Potential Output Real GDP