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Production gap is a term that is used to describe a situation where there is a perceptible gap between where a country currently is and where such a country could be in terms of industrial production. This may be applied to virtually every industry as a means of gauging the efficiency and health of such an industry. The aggregate production gap measures that are collated through the analysis of all of the industries in the economy can help give an indication of the health of the economy in terms of whether such an economy is operating at its maximum or below maximum. The chief use of the production gap measure is its value as a means for gauging if a country or industry is actually fulfilling its full production potentials. If not, it gives an indication of how far a country or industry is from filling this production gap, giving an idea of how much work or investment is needed to bridge the gap.
The determination of the existence of a production gap in an economy will allow a country to decide on policies needed to bridge the gap. An example of this can be shown by using an agricultural industry in a country. Assuming a country has a lot of land and labor that are vastly underutilized, a measurement of the production gap will show by how much percentage the country is lagging in its potential ability to maximize the production in the agricultural industry. This knowledge will allow the government or other investors to decide on the necessary steps to take to address this gap in potential and reality.
Part of the solution might be for the government to make deliberate efforts aimed at the development of this industry, which might include certain market interventions in the form of tax reductions for farmers and the application of subsidies in the supply of raw materials to the farmers, to serve as an enabling factor to encourage them to increase their general rate of production. Other efforts toward bridging this gap need not be limited to internally generated efforts since the government can also encourage investors to come from other countries and help reduce or eliminate the gap in production. For example, some farmers could come from another country that has maxed out its agricultural production capabilities due to a shortage of land in order to take advantage of the opportunities presented by the abundance of land in the under-producing country.