When does an economy experience a positive output gap?

An economy experiences a positive output gap when actual GDP exceeds potential GDP. Potential GDP represents the maximum amount of goods and services an economy can produce when operating at full efficiency, without generating inflationary pressures. When actual GDP is higher than this potential level, it indicates that the economy is performing beyond its sustainable capacity, often due to temporary factors such as increased consumer demand or government stimulus.

This excess output can lead to upward pressure on prices, as businesses may struggle to keep up with the increased demand, resulting in inflation. Thus, a positive output gap is typically associated with an economy operating above its long-term potential, which can have both stimulating effects in the short term but may also lead to economic overheating. Understanding this concept is crucial for analyzing economic performance and implementing appropriate monetary and fiscal policies.