How to Calculate a Recessionary Gap
A recessionary gap equals potential real GDP minus actual real GDP: the dollar amount by which output falls short of full employment.
The Recessionary Gap formula
Calculator
Enter potential and actual real GDP to size the recessionary gap and the spending increase that closes it.
Full-employment output, drawn as the vertical long-run aggregate supply curve.
Short-run equilibrium output, where aggregate demand crosses short-run aggregate supply.
Only used for the spending increase that closes the gap.
Output falls $45B short of full employment, so cyclical unemployment is positive.
- Gap as a percent of potential GDP
- 5%
- Spending multiplier
- 5
- Government spending increase needed
- $9B
- Output status
- Recessionary gap
The dollar gap divided by potential GDP, never by actual GDP.
1 divided by (1 minus MPC), which is the same as 1 divided by MPS.
Divide, do not multiply: $9B of new spending closes the $45B gap once the multiplier works through the economy.
How to calculate Recessionary Gap, step by step
- 1Find potential real GDP. Potential GDP is full-employment output, drawn as the vertical long-run aggregate supply curve.
- 2Find actual real GDP. Actual output is the short-run equilibrium where aggregate demand crosses short-run aggregate supply.
- 3Subtract actual from potential. Recessionary gap = potential − actual, so the answer is positive whenever output sits below potential.
- 4Convert to a percent if asked. Divide the dollar gap by potential GDP and multiply by 100.
- 5Keep the gap separate from the policy fix. The spending increase needed to close the gap is the gap divided by the spending multiplier, which is a much smaller number.
Worked example: Recessionary Gap
Suppose potential real GDP is $900B and actual real GDP is $855B. The recessionary gap = 900 − 855 = $45B, which is 45 ÷ 900 = 5% of potential GDP, and cyclical unemployment is positive. If MPC = 0.8, the spending multiplier is 1 ÷ 0.2 = 5, so closing the gap takes an increase in government spending of only 45 ÷ 5 = $9B, not $45B.
Recessionary Gap questions
Is the recessionary gap the same as the spending change needed to close it?
No, the gap is the shortfall in real GDP, while the required spending increase is that gap divided by the spending multiplier, so the policy change is always smaller than the gap.
What happens to unemployment during a recessionary gap?
Unemployment rises above the natural rate, so cyclical unemployment is positive. Short-run equilibrium output sits to the left of long-run aggregate supply.
How does a recessionary gap close on its own?
Nominal wages and other input prices eventually fall, shifting short-run aggregate supply right until output returns to potential. Self-correction is slow because wages are sticky downward.
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