The output gap refers to the disparity between the actual output of an economy and the potential output of the economy. The difference between the actual economic production and the potential production of the economy is considered as the output gap of a certain country. The maximum amount of output which the economy can produce is called the potential output. The output gap has two directions, one is the positive output gap and the other one is the negative output gap. Positive output gap refers to the output gap which occurs when the actual output becomes more than the potential output level (Garratt, et al, 2010). The negative output gap occurs when the potential output level of an economy becomes more than the actual output level. The financial crisis in the UK economy has reduced the actual output of UK economy. Due to the recession the actual output has become less than the potential output which creates a negative output gap in the UK economy. For The UK economy the potential output is more than the actual output. Often it happens that after recession the economy recovers the output similar to its potential output. But it is difficult to say whether the economy can continue the high output growth in this respect in the long run. The UK economy is also faced with the similar kind of activities. The present output gap which the UK economy is facing is approximately 4.5% according to the report of Bank of England, 2014 (Clements & Sensier, 2003).
The actual output of UK economy is less than the potential output of UK economy after the recession, but recently the output is growing rapidly of UK economy. Still it is found that the actual output is less than the potential output of the economy. The economy cannot utilize the full capacity as the labours and capital in the economy are kept unutilized for a long term. From last 5-6 years the UK economy has been facing the longest output gap in the economy. The workers are idle in the economy and are facing the problem of unemployment (Garratt, et al, 2009). The capital is also remaining idle in the economy.