Output Gap vs Recessionary Gap
Output Gap and Recessionary Gap are two The Business Cycle concepts in AP Economics that students often mix up. The output gap is the difference between actual real GDP and potential real GDP. A recessionary gap is the difference between full-employment real GDP and actual real GDP when actual is less than full employment. Here is how they compare side by side.
The output gap can be positive (an inflationary gap) or negative (a recessionary gap). It represents the amount by which an economy's actual output differs from its potential output. Policymakers often try to minimize the output gap.
A recessionary gap occurs when an economy is producing less than its potential, leading to higher unemployment. This typically happens during a contraction in the business cycle. The gap represents the amount by which real GDP falls short of potential GDP.
Output Gap vs Recessionary Gap: The General Measure and One of Its Two Cases
| Output Gap | Recessionary Gap | |
|---|---|---|
| What it covers | Any difference between actual and potential real GDP, in either direction | Only the case where actual output falls short of potential |
| Sign | Actual minus potential, so it can be negative, zero or positive | Quoted as a positive size, found as potential minus actual |
| What a value of zero means | Output is exactly at potential | There is no recessionary gap to speak of |
| Unemployment implied | Above, at or below the natural rate depending on the sign | Above the natural rate, with cyclical unemployment present |
| Pressure on prices | Downward, neutral or upward depending on the sign | Downward pressure on wages and prices as the gap persists |
| Policy it points to | Depends entirely on the sign | Expansionary fiscal or monetary policy |
| How it is drawn | The distance between equilibrium output and LRAS, on whichever side | Equilibrium output sitting to the left of the LRAS line |
One term is the measurement and the other is a label for the negative case
The output gap is the general quantity: actual real GDP minus potential real GDP. It has a sign, and the sign carries the economics. Suppose potential output in an illustrative economy is 950 billion dollars. If actual output is 900 billion dollars, the output gap is negative 50 billion dollars, or about 5.3 percent of potential, and that negative gap is what the term recessionary gap names. If actual output is instead 980 billion dollars, the output gap is positive 30 billion dollars, about 3.2 percent of potential, and that positive gap is called an inflationary gap at /glossary/inflationary-gap. Same formula, same economy, opposite signs, different names. This is why the two terms cannot be swapped. Every recessionary gap is an output gap, but only the negative half of output gaps are recessionary gaps. Writing that an economy has an output gap says almost nothing on its own, since it leaves out the direction. Writing that an economy has a 50 billion dollar recessionary gap fixes both the size and the side. The calculation with other numbers is at /calculate/output-gap.
State the size and the side, because conventions vary
Textbooks do not agree on how to sign these quantities. Some write the output gap as actual minus potential, which makes a shortfall negative. Others report the same shortfall as a positive number and rely on the word recessionary to supply the direction. A percentage version, the gap divided by potential output multiplied by 100, is also common because it allows comparison between economies of different sizes. None of these is wrong, and a grader is not reading your mind, so the safe habit is to give the number and then say in words which side of potential the economy is on. The other reason to be careful is that both quantities depend on an estimate rather than an observation. Actual real GDP is measured. Potential output is not, since it is the level associated with full employment of resources, and it has to be inferred. Two reasonable estimates of potential can turn the same measured output into a small gap or a large one. Potential output is the vertical line at /glossary/long-run-aggregate-supply.
Frequently asked questions
What is the difference between the output gap and a recessionary gap?
The output gap is the general difference between actual and potential real GDP and can be positive or negative, while a recessionary gap is specifically the case in which actual output falls below potential. A positive output gap is called an inflationary gap instead. The recessionary gap is one half of the broader measure.
Is the output gap negative in a recession?
The output gap is negative whenever actual real GDP is below potential, which is the usual situation during and after a recession, though the two are not the same thing. An economy can enter a downturn from above potential and spend the first part of the decline with a positive gap. The sign tracks the level of output, not the direction it is moving.
How do you calculate the output gap?
Subtract potential real GDP from actual real GDP, then divide by potential and multiply by 100 if you want it as a percentage. Actual output of 900 billion dollars against potential of 950 billion dollars gives a gap of negative 50 billion dollars, or about negative 5.3 percent. Always state whether output is above or below potential.
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