[MUSIC] So, once we know what potential GDP is for the economy, we can move to a really important concept, which is the output gap, or I'm going to give a different name to it in a later session where we actually draw it and, and identify what policy makers should do. The output gap is the difference between how much we're growing and how much we should grow if we wanted to be at that ideal place. Okay, now obviously the output gap could be positive, in other words, we are growing too fast. All right. We are overheating, all right. And so, we could have a positive output gap. Some number greater than one, hard to remember what that felt like, but it does happen. Or, we could have a negative output gap, where we're growing slower than we would like to be, than we actually should be, if we wanted inflation and unemployment to be reasonable, okay? If we're growing too slowly, we'll say we have a negative output gap, and on the chart this will show up as some negative number, okay? If we growing right where we should be, there's no output gap and so on the chart I'm going to show you right now; that will show up as zero, okay? So what we're going to be analyzing in this, in this next webshot from, from the OECD is the difference between how much the economy's GDP is actually growing and how it much it should grow, if we were at that ideal place, which is potential GDP. So, let's just look at this OECD screen. You can see that, this is the United States over quite a long period. Again, I started in 1990. And you can see, if you think of positive numbers as growing too fast. Positive output gap. And negative numbers is growing too slow, negative output gap. You can see that the US economy actually was growing too slowly for a very long period, from the early 90s to the late 90s. Okay? You see this negative output gap here, and then you can see that it moves into positive numbers about the, end of the 90s. And going all the way until this financial crisis. So, look at that long period of a positive output gap, the economy going faster than it actually should have. Now, later on, we'll think about this, and we'll, we'll realize that that was a problem. Okay? And then you can see the financial crisis hits, begins in 2008. And you can see that we drop from a positive output gap, to a negative output gap. So, we're growing too slowly. We're growing less than potential. And this continues up until the present time and even according to the OECD, it will continue through 2014. Okay, so looking at it this way, we can, we're not actually looking at GDP growth rates, we're looking at GDP growth minus our target, and we can kind of make sense out of the figures. Now, we can make the same analysis of any group of countries, right? It's usually easiest with the developed countries because the OECD gives us a very, the OECD gives us a very precise estimate every year, of how much the economy could produce if it were at potential, at that rate of growth it can sustain over the medium term without accelerating inflation. And so, you can actually go to the OECD webpage, OECD.org. Go to statistics, look for the output gap, and you can find these numbers for a wide range of countries. I've just put on this slide four countries, the United States is here again, I've put Finland, Japan and Portugal to give us, you know, some different situations and we start in 1990 and go until 2010, and you can see, on this slide, that again, there is the profile of the United States, it's the red bars. And you can see that the United States has a positive output gap at the beginning of the 90s and then it's got a negative one. In other words, it's growing too slowly throughout the 90s until we hit, the early the, the end of the 90s and then going into the early 2000s. I'd like you to look, at Japan next, which is the green bars and Japan is very interesting. Here you can see that Japan in the early 1990s, was growing way above potential. It had a positive output gap. In other words, it was overheating, we might say. And you can see that as the Japanese financial crisis hit in the 1990s, that this output gap shrinks, and eventually, it becomes negative. So, you can see they are growing below potential, starting in the late 90s and going almost to the present time. This is really long negative output gap which we'll give another name to soon. Because you know that in the late 90s, the Southeast Asian crisis began. This hit Japanese banks when they were just kind of starting to recover from their own financial crisis. This accounts for the later output gap. And then we get, of course, the global financial crisis, which pushes them down again, in, in the 2000s. You can see Finland here, and Finland's an interesting story, because, with the fall of the Soviet Union, Finland kind of moving out of this period of Finlandization, of kind of a dependence on the Soviet block countries. You can see, they had an enormous negative output gap in the 1990s. again, this was not necessarily recession, but it did mean that GDP was growing a lot slower than it should have. Okay, which probably aggravated their unemployment problem. And you can see that as time goes, they come out of it. They're out of it in the early 2000s, as almost everybody was, except for Japan. They go back into it a little bit, out, and then in again. So, you can see this, this sort of varies over time. If you look at Portugal, which is these purple lines, you can see a different story. You can see Portugal with a big positive output gap. Overheating, growing too fast in the early 1990s. You can see it dips down, as most of the other countries do in the mid 1990s. It comes back out in the late 1990s, up until the 2000s, and then Portugal drops into a negative output gap at the beginning of the 2000s. And stays there until the present time. So, just looking at different countries, comparing how much they're growing with how much they could grow, if inflation were to be relatively constant and unemployment were to be at a pretty good level, we can get an idea of where they stand. And in a sense, what kind of problems they have. In a way, doing this is like a doctor looking at a very complex human body that walks into his office and to make sense of all the different indicators, the different problems or, or strength of this body, the doctor may take your body temperature. He may take your blood pressure. And then, the doctor gets an idea of what might be right. What might be wrong. With your physical situation. This is what we're doing with GDPs as we compare them to potential GDP over time. [MUSIC]
