Recessionary Gap vs Inflationary Gap
Recessionary Gap and Inflationary Gap are two The Business Cycle concepts in AP Economics that students often mix up. In short: recessionary gap is a recessionary gap is the difference between full-employment real GDP and actual real GDP when actual is less than full employment. Meanwhile, inflationary gap is an inflationary gap is the difference between actual real GDP and full-employment real GDP when actual exceeds full employment. Here is how they compare side by side.
A recessionary gap is the difference between full-employment real GDP and actual real GDP when actual is less than full employment.
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.
An inflationary gap is the difference between actual real GDP and full-employment real GDP when actual exceeds full employment.
An inflationary gap occurs when an economy is producing more than its potential, leading to upward pressure on prices. This typically happens during an expansion in the business cycle. The gap represents the amount by which real GDP exceeds potential GDP.