The formula to calculate the GDP gap is:
\[ \text{GDP Gap} = \text{Potential GDP} - \text{Actual GDP} \]
Where:
Let's say the potential GDP is $1,000,000 and the actual GDP is $900,000. Using the formula:
\[ \text{GDP Gap} = 1,000,000 - 900,000 \]
We get:
\[ \text{GDP Gap} = 100,000 \]
So, the GDP gap is $100,000.
A GDP gap, also known as an output gap, is a macroeconomic concept that measures the difference between the actual Gross Domestic Product (GDP) and the potential GDP of an economy. The potential GDP refers to the maximum output an economy can produce without causing inflation, assuming all resources are fully employed. When the actual GDP is less than the potential GDP, it indicates an underperforming economy, often characterized by unemployment and idle resources, and is referred to as a negative GDP gap or recessionary gap. Conversely, when the actual GDP exceeds the potential GDP, it suggests an overheated economy, often associated with inflation, and is referred to as a positive GDP gap or inflationary gap. The GDP gap is a critical indicator for policymakers to assess the health of an economy and make decisions regarding fiscal and monetary policies.
Definition: The GDP gap is the difference between the actual GDP and the potential GDP of an economy.
Formula: \( \text{GDP Gap} = \frac{\text{Actual GDP} - \text{Potential GDP}}{\text{Potential GDP}} \)
Example: \( \text{GDP Gap} = \frac{20,000 - 18,000}{18,000} \)
Definition: The GDP gap can also be calculated using the unemployment rate, based on Okun's Law.
Formula: \( \text{GDP Gap} = -2 \times (\text{Actual Unemployment Rate} - \text{Natural Unemployment Rate}) \)
Example: \( \text{GDP Gap} = -2 \times (7\% - 5\%) \)
Definition: The dollar gap measures the absolute difference between actual GDP and potential GDP.
Formula: \( \text{Dollar Gap} = \text{Actual GDP} - \text{Potential GDP} \)
Example: \( \text{Dollar Gap} = 20,000 - 18,000 \)
