POTENTIAL GDP:

• The highest market value of goods and services that can be produced in an economy by utilizing the whole potential of the economy over a period of time is referred to  as potential GDP.
•  Like GDP, potential GDP represents the market value of goods and services, but rather than capturing the current status  of a nation’s economic activity, potential GDP attempts to estimate the highest level of output an economy can sustain over a period of time.
• It assumes that an economy has achieved full employment and that aggregate demand does not exceed aggregate supply.
• When GDP falls short of that natural limit, it means the country is failing to live up to its economic potential.

Determinants of potential GDP are Inflation, Recession, Factory output, productivity, Currency depreciation, foreign capital Reserves, Infrastructure

OUTPUT GAP:

The difference between potential and real GDP is called the output gap.

POSITIVE OUTPUT GAP /INFLATIONARY GAP:

• If the real GDP exceeds potential GDP, then the output gap is positive.
• This is also referred to as inflationary gap.
• An inflationary gap endures when the demand for goods and services exceeds production above its sustainable limits, and that aggregate demand is outstripping aggregate supply. 
• This situation is marked by higher overall employment levels, increased trade, or high government expenditure.
• The inflationary gap depicts the point in business cycle when the economy is growing.

NEGATIVE OUTPUT GAP /DEFLATIONARY GAP :

• When the potential GDP is higher than the real GDP,then the output gap is negative.
•  This gap is also referred to as a deflationary gap. 
• In the scenario of negative output gap, demand for goods and services is weak. 
• It’s a sign that the economy may not be at full employment.