The phrase
"output gap" refers to the difference between the actual level of economic activity in a country and its potential level. It shows whether an economy is operating below or above its full capacity. If the
output gap is positive, it means the economy is operating below its potential, leading to unused resources and lower production. If the
output gap is negative, it signifies that the economy is operating above its potential, which can cause inflation and unsustainable growth.
Full definition