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    Hi

    I've have been reading through many books and articles, but i just can't seem to get my head around these few concepts. I was wondering if anyone could help me.

    Firstly is the idea of a positive output gap, i know that this is when the economy is performing at over capacity. But what i don't get is how can an economy perform at over capacity?

    Secondly is the idea and difference between a structural deficit and a cyclical deficit. My teacher told me a structural deficit is formed by constantly living above your means, but she couldn't provide and example. She told me a Cyclical deficit is caused by automatic stabilisation. (Which i pretty much understand).

    Please help.

    Thank you.
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    (Original post by miles.harmsworth)
    Hi

    I've have been reading through many books and articles, but i just can't seem to get my head around these few concepts. I was wondering if anyone could help me.

    Firstly is the idea of a positive output gap, i know that this is when the economy is performing at over capacity. But what i don't get is how can an economy perform at over capacity?

    Secondly is the idea and difference between a structural deficit and a cyclical deficit. My teacher told me a structural deficit is formed by constantly living above your means, but she couldn't provide and example. She told me a Cyclical deficit is caused by automatic stabilisation. (Which i pretty much understand).

    Please help.

    Thank you.
    Lets rephrase this a little, a positive output gap is not an economy performing at over capacity. It is however,
    "An economy that is growing above its sustainable long run trend rate of growth"

    So think of this concept like an overheating radiator. It's still performing, but its working at a rate that is unsuitainable in the long run.

    So a positive output gap, if you look at this diagram: the positive output gap is the area above the straight line ('boom') - the highest turning point.

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    Secondly, lets sort out the definitions for cyclical/structural:
    Cyclical Deficit - This is when the government run a budget deficit resulting from fluctuations in the economic cycle. E.G ...

    So when there is a recession, more people are out of jobs and claiming benefits = the cyclical 'economic cycle' deficit goes up. But when the economy improves and is out of recession, automatic stabilisers supposedly kick in and self-finance the deficit due to increased tax revenue from people being in jobs again and hence automatic stabilisers pay off the debt of paying people benefits for being out of work.

    Structural Deficit - This is a deficit that results in fundamental changes in the structure of the UK economy, think of it more as long term debt.
 
 
 
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