Recession vs Recessionary Gap
Recession and Recessionary Gap are two The Business Cycle concepts in AP Economics that students often mix up. A recession is a significant decline in economic activity lasting more than a few months. 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.
A recession is a period of economic contraction characterized by falling output, rising unemployment, and decreasing income. Recessions are typically identified by a decline in real GDP for at least two consecutive quarters. During a recession, businesses often cut back on production and lay off workers, leading to reduced consumer spending and further economic weakness.
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.
Recession vs Recessionary Gap: A Direction of Travel and a Distance From Potential
| Recession | Recessionary Gap | |
|---|---|---|
| What it describes | A change over time, with activity falling for a sustained period | A position at a moment, with actual real GDP below potential |
| How you would measure it | Compare this period's activity with the periods before it | Subtract actual real GDP from full-employment real GDP |
| Can it exist while GDP is growing | No, since falling activity is what the word means | Yes, since output can grow and still sit below potential |
| Where you see it | On a plot of real GDP against time | As the horizontal distance from the AD-AS equilibrium to the LRAS line |
| What unemployment is doing | Rising | Sitting above the natural rate, whether or not it is still climbing |
| When it ends | At the trough, when the decline stops | When output returns to potential, which is normally later |
| What policy is asked to do | Halt the decline | Close a measured distance, using the gap divided by the multiplier |
An economy can be growing and still have a recessionary gap
Put numbers on the distinction. Full-employment real GDP is 900 billion dollars in an illustrative economy. Activity falls for three quarters and actual real GDP reaches 855 billion dollars, so the recessionary gap is 45 billion dollars, which is 5 percent of potential. The following quarter output rises to 870 billion dollars. The recession is over on any reasonable reading, since production is expanding again, yet the gap is still 30 billion dollars and unemployment is still above the natural rate. One condition ended and the other did not. That is why the two words answer different exam questions. A question about the phase of the cycle is asking which way output is moving. A question about the gap is asking how far output is from potential. The gap also carries a policy number that the phase does not. With a marginal propensity to consume of 0.75, the spending multiplier is 4, so closing a 45 billion dollar gap needs an increase in government purchases of 45 divided by 4, which is 11.25 billion dollars. The same calculation is worked at /calculate/recessionary-gap.
The two clocks run at different speeds, and unemployment lags both
The sequence matters for describing a downturn accurately. Output usually starts falling before the gap opens, because an economy at or above potential has room to decline before it drops below full employment. At the other end, output stops falling at the trough while the gap stays open, sometimes for years, because getting back to potential requires growth fast enough to make up lost ground rather than merely positive growth. Unemployment is slower still. Firms hold onto workers early in a decline, then rehire cautiously once demand returns, so the unemployment rate often keeps rising for a while after production has turned upward. A recovery in which output grows but the gap barely narrows is therefore an ordinary outcome rather than a contradiction, and it is a common source of confusion when headlines say the downturn has ended while hiring stays weak. On the diagram, the recession is the descending stretch of the curve and the gap is a horizontal distance measured at one point in time, from the current equilibrium output across to the long-run aggregate supply line. Turning points and phases are set out at /macro/business-cycle.
Frequently asked questions
Is a recessionary gap the same as a recession?
No, a recession is a sustained fall in economic activity while a recessionary gap is the amount by which actual real GDP sits below full-employment real GDP at a point in time. One describes a direction of change and the other describes a distance. They often overlap, but neither requires the other.
Can there be a recessionary gap without a recession?
Yes, an economy that is growing again after a downturn can stay below potential output for a long time, which leaves a recessionary gap open even though the recession has ended. The reverse also happens, since an economy above potential can begin to contract while still producing more than full-employment output. Direction and position are separate facts.
How do you calculate a recessionary gap?
Subtract actual real GDP from full-employment real GDP, so potential output of 900 billion dollars against actual output of 855 billion dollars gives a gap of 45 billion dollars. To find the spending change needed to close it, divide the gap by the spending multiplier. Quote the gap as a positive size and state that output is below potential.
Live Business Cycle graph. Drag the curves, or open the full version.
Live AD/AS Model graph. Drag the curves, or open the full version.
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