The output gap is defined as:

The output gap is defined as the difference between actual output and potential output. It measures how far an economy is operating from its potential level of production, which reflects the maximum sustainable output that could be achieved if all resources were fully utilized. This concept is crucial for policymakers, as a negative output gap indicates that the economy is underperforming and may suggest the need for intervention to stimulate economic activity. Conversely, a positive output gap can indicate an overheating economy, with potential inflationary pressures.

Understanding this distinction helps in analyzing economic performance and making informed decisions regarding fiscal and monetary policies aimed at stabilizing or stimulating the economy. The other concepts mentioned, such as trade ratios, income disparities, and the balance between consumer spending and business investment, do not provide the same insight into overall economic efficiency and productivity as the output gap does.