Output Gap Formula, Examples, Positive Vs Negative Gaps
What is Output Gap (GDP Gap)?
The difference between real gross domestic product and potential gross domestic product is called the “output gap”. There may be positive and negative output gaps.
When nominal GDP is adjusted for inflation, we call it “real GDP”. Since the real GDP is free from price level changes, it is highly acceptable to measure the economic growth of a country.
Potential GDP is the level of gross domestic product (GDP) that the economy able to achieve by operating at a full employment output level. So, potential GDP presents the output level that maximum using the resources within the productive capacity, especially at a constant inflation rate.
Potential GDP provides an important benchmark for regulators and policymakers. It is the healthy level of GDP of an economy. But, in the real world, actual (real) GDP can vary from the potential GDP.
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Output Gap Formula (GDP Gap Formula)
We can calculate the GDP gap using the “GDP gap formula”. GDP gap formula is the difference between the actual GDP and potential GDP is divided by the potential GDP and multiplied by 100. GDP gap formula can be presented as follows
GDP Gap Example
Assume that following information is regarding the GDP of USA for the year 2022
| Real GDP (Actual GDP) | USD 110bn |
| Potential GDP | USD 100bn |
Calculate the GDP Gap
Output Gap = (Actual GDP– Potential GDP) ÷ (Potential GDP) * 100
Output Gap = (USD 110bn – USD 100bn) ÷ 100 * 100
Output Gap = 10 percent of real potential GDP
GDP Gap Calculator
Other than output gap formula, we can calculate the output gap using a GDP gap calculator. It is very easy. You have to only type the real GDP value and actual GDP value and then GDP gap calculator calculate the output gap.
What is positive vs negative output gap?
There are two major types of output gaps. They are positive output gaps and negative output gaps.
The potential GDP level is shown as the “growth trend” of a business cycle. The business cycle goes through four major phases: expansion, peak, contraction, and trough. So, at the points, the actual GDP is equal to the growth trend line, the economy is operating at the potential output level.
If real output level > potential GDP, there is an inflationary gap.
If real output level < potential GDP, there is a recessionary gap.
Let’s discuss about them broadly.
Positive Output Gap
Positive output gap is also called as inflationary gap
If real output level > potential GDP, there is an inflationary gap.
The positive output gap (inflationary gap) measures the amount of actual GDP exceeding the potential GDP level of the economy. In other words, the inflationary gap is a macroeconomic theory to determine the positive difference between the current level of real gross domestic product (GDP) and the full employment level GDP of the economy.
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Inflationary gap – Definition, Examples, Graph & how to remove
Recessionary and Inflationary Gaps in The Income-Expenditure Model
Positive Output Gap Graph
AD-AS model
Using the AD-AS model, the positive GDP gap can be graphed as follows.
According to the above graph, the potential output level (full employment output level) is shown in the Yf. The actual output level is shown in the Y1. So, the actual output level exceeds the full employment output level. The difference between the actual GDP level and full employment GDP level is called the “positive output gap”.
Income Expenditure Model
The income expenditure model of economics was developed by John Maynard Keynes to explain fluctuations in production of goods and services and spending.
A positive output gap can be shown using the income-expenditure model. A positive output gap arises when the level of planned expenditure is above that which is required to purchase all the output that could be produced over a period of time. This would be associated with demand-pull inflation. Demand-pull inflation describes that increasing demand for goods and services increases the price level. Aggregate expenditure is comprised of 4 components. They are private consumption, private investment, government expenditure, and exports. If these components are increased, there may be demand-pull inflation.
At point Yf, the economy is at the full employment level. After that aggregate expenditure increased from E0 to E1 and equilibrium output level has increased to Y1 output level. At the Y1 point, the economy is producing beyond the full employment output level. The positive gap between actual output and potential GDP is called the inflationary gap or positive output gap. So, in the above graph, the positive output gap is the difference between the Y1 output level and the Yf output level.
Negative output gap
Negative output gap is also called as recessionary gap
If real output level < potential GDP, there is a recessionary gap.
The negative output gap (recessionary gap) is the negative gap between the actual GDP level and the potential GDP level of the economy. In other words, the negative output gap (recessionary gap) measures the amount of actual GDP less than the potential GDP level of the economy.
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Recessionary Gap – Definition Examples Graph How To Remove
Recessionary and Inflationary Gaps in The Income-Expenditure Model
Economic Growth, Recession & Inflation in AD-AS Model
Negative Output Gap Graph
Using the AD-AS model, the negative GDP gap can be graphed as follows.
According to the above graph, the potential output level (full employment output level) is shown in the Yf. The actual output level is shown in the Y1. So, the actual output level is less than the full employment output level. The gap between the actual output level and the full employment output level is called the negative output gap.
A negative output gap can be shown using the income-expenditure model. A negative output gap arises when the level of planned aggregate expenditure is below that which is required to purchase all the output that could be produced over a period of time. Aggregate expenditure is comprised of 4 components. They are private consumption, private investment, government expenditure, and exports. If these components are decreased, there may be a recessionary gap.
After that aggregate expenditure decreased from E0 to E1 and the equilibrium output level has decreased to Y1 output level. At the Y1 point, the economy is producing below the full employment output level. The negative gap between actual output and potential GDP is called the recessionary gap or negative output gap. So, in the above graph, the negative output gap is the difference between the Y1 output level and the Yf output level.
