GDP Gap
A GDP gap is the difference between the actual gross domestic product (GDP) and the potential GDP of an economy as represented by the long-term trend. A negative GDP gap represents the forfeited output of a country's economy resulting from the failure to create sufficient jobs for all those willing to work. A large positive GDP gap, on the other hand, generally signifies that an economy is overheated and at risk of high inflation.The difference between real GDP and potential GDP is also known as the output gap.
Definition: The GDP gap refers to the difference between actual Gross Domestic Product (GDP) and potential GDP. Potential GDP represents the long-term trend output of an economy operating at full employment and optimal resource utilization. A negative GDP gap indicates that the economy is not creating enough jobs for all willing workers, resulting in lost output. Conversely, a positive GDP gap usually means the economy is overheating and facing high inflation risks. The difference between actual GDP and potential GDP is also known as the output gap.
Origin: The concept of the GDP gap originated from Keynesian economics, particularly during the Great Depression of the 1930s. Keynes proposed that governments should use fiscal and monetary policies to regulate economic activity, reduce the GDP gap, and promote economic stability and growth.
Categories and Characteristics: The GDP gap is mainly divided into positive and negative gaps.
- Positive Gap: Actual GDP is higher than potential GDP, usually accompanied by high inflation and overutilization of resources.
- Negative Gap: Actual GDP is lower than potential GDP, usually accompanied by high unemployment and underutilization of resources.
Specific Cases:
- Case 1: After the 2008 financial crisis, the United States experienced a significant negative GDP gap, with actual GDP far below potential GDP, leading to high unemployment and economic recession. The government implemented large-scale fiscal stimulus and monetary easing policies to narrow this gap.
- Case 2: The oil crisis of the 1970s led to positive GDP gaps in many countries, where actual GDP exceeded potential GDP, resulting in high inflation. Governments implemented tight policies to cool down the economy and reduce inflation.
Common Questions:
- How is the GDP gap calculated? The GDP gap is typically calculated as the difference between actual GDP and potential GDP, using the formula: GDP Gap = Actual GDP - Potential GDP.
- Why is the GDP gap important? The GDP gap is a crucial indicator of economic health, helping policymakers adjust economic policies to achieve stable growth.
