How to Calculate the Output Gap
The output gap equals actual real GDP minus potential real GDP, reported either in dollars or as a percent of potential GDP.
The Output Gap formula
Calculator
Enter actual and potential real GDP to get the output gap in dollars and as a percent, with its sign read for you.
This year's real output. It goes first in the subtraction.
Full-employment output for the same year, and the denominator of the percent version.
The negative sign is the answer: actual output sits $36B below potential, so cyclical unemployment is positive.
- Output gap as a percent of potential
- −4%
- Size of the gap ignoring sign
- $36B
- Type of gap
- Recessionary gap
The dollar gap divided by potential GDP, times 100. Dividing by actual GDP is the usual slip.
How the gap is quoted once you have named its direction in words.
Negative is a recessionary gap, positive is an inflationary gap, zero is full employment.
How to calculate Output Gap, step by step
- 1Write down both output levels. You need actual real GDP and potential real GDP for the same year, both measured in real dollars.
- 2Subtract in the right order. Output gap = actual − potential, so a shortfall comes out negative and an overheating economy comes out positive.
- 3Divide by potential GDP. For the percent version, divide the dollar gap by potential GDP, never by actual GDP.
- 4Multiply by 100 and label the sign. A negative percent is a recessionary gap and a positive percent is an inflationary gap.
Worked example: Output Gap
If actual real GDP is $864B and potential real GDP is $900B, the output gap = 864 − 900 = −$36B, or (−36 ÷ 900) × 100 = −4%. The negative sign means a recessionary gap of $36B. Two years later, actual real GDP of $918B against the same $900B potential gives 918 − 900 = +$18B, an output gap of (18 ÷ 900) × 100 = +2%, which is an inflationary gap.
Output Gap questions
Is a negative output gap bad?
Yes, a negative gap means output is below potential, so cyclical unemployment is positive and labor and capital sit idle.
What is potential GDP?
Potential GDP is the output the economy sustains when unemployment equals its natural rate. It is the vertical long-run aggregate supply curve on the AD-AS graph.
Do you divide by actual GDP or potential GDP?
Divide by potential GDP, because potential is the benchmark the economy is being compared against.
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