question is abt inflationary and deflationary gaps
what is the measurment of these gaps?
like in terms of quantity demanded/supplied or in terms of national income??
if i were to assign a value to inflationary or deflationary gap what would be the unit??
options
1---gap=difference in "national income"
2---gap=difference in agg.demand
3---gap=difference in prices
When aggregate demand exceeds an economy's productive potential there is an inflationary gap. We tend to see rising inflation and a worsening trade situation at these times. This situation occurs when the economy has been growing for some time leading to a build up of inflationary pressure as demand rises.
Hope it suffice.
DT
yaar i know what its effects are and when it occurs
my question is
if i have to measure it(quantitatively) then what it would be equal to?
like arithmatic
is it difference between
1---# national income at equilibrium
and
the national income at disequilibrium.i.e national income during inflation or deflaton
2# the aggregate quantitative demand during equilibtrum
and
during disequilibrium
like on which axis ,with which units...is these gaps measured???
salamz,
yaar to show a deflationary gap grphically u can plot "Real National Income" along the x-axis and "Price" levels along the "y-axis".
Aggregate Supply(A.S) is an upward sloping curve upto the "labour constraint" from where it becomes a vertical straight line. The Aggregate Demand(A.D) is a downward sloping curve.
when the A.D intersects with A.S at the point where the A.S becomes vertical, the state is know as full employment with zero inflation.
when the A.D intersects with the A.S at a point beyond the labour contraint we are working at full employment but the price levels are inflated. the gap b/w the prices now and the prices when we were working at full employment with zero inflation is the "inflationary gap". I think that the %age difference between these price levels should be taken as a measure of inflationary gap, however i am not sure about how to measure inflationary gap quantatively.
The graph i am refering to is in PBP study text.
opposite is the case with deflationary gap.
I would appreciate if anybody could elaborate more on this.
Regards,
Ice Blue
yaar i have studied the pbp well i know what the gaps represent.
my question was what u answered in the end
are the gaps "measured"along price axis or along national income axis?
becoze sometime they say
"gap shows how much agregate demand needs to be raised/decreased to rreaach the equilibrium level"
and sometime this
"the gap shows how much less or more national income is, at the present level compared to the equilibrium level"
i think u got the question right and what u wrote i suspect that also
but in some other books they show the gap on the income axis
waiting for someone who has passed eco paper to tell both of us.
btw..ice blue are u studying only from study text or other bookds also?
in the case of inflationary gap, the real national income does not change and thus the change in real national income is zero, leaving price levels as the only means for measure of inflationary gap.
in the case of deflationary gap, i am also confused because there is also a difference b/w national income at full employment and the equilibrium national income in addition to a difference in price levels.
i am trying to study from study text and samuelson. i also check with haleem khwaja for help on presentation.
if u get more info on this topic, plz do post it here.
moreover, we measure inflation as a %age change in CPI and CPI is a measure of price levels. -ve inflation is deflation.
Regards,
Ice Blue