Output gap

Potential (light) and actual (bold) GDP estimates from the Congressional Budget Office. The difference between the two represents the GDP gap.

IMF estimates of the 2009 output gaps as % of GDP by country

The GDP gap or the output gap is the difference between potential GDP and actual GDP or actual output. The calculation for the output gap is Y*–Y where Y* is actual output and Y is potential output. If this calculation yields a positive number it is called an inflationary gap and indicates the growth of aggregate demand is outpacing the growth of aggregate supply—possibly creating inflation; if the calculation yields a negative number it is called a recessionary gap—possibly signifying deflation. ^[1]

The percentage GDP gap is the actual GDP minus the potential GDP divided by the potential GDP.

${(GDP_{actual} - GDP_{potential})}\over{GDP_{potential}}$.

Okun's Law: The relationship between output and unemployment

Okun's Law is based on regression analysis of US data that shows a correlation between unemployment and GDP. Okun's law can be stated as: For every 1% increase in cyclical unemployment (actual unemployment - natural rate of unemployment), GDP will decrease by β%.

%Output gap = -β x %Cyclical unemployment

This can also be expressed as:

(Y-Y*) / Y* = -β(u-ū)

where:

• Y is actual output
• Y* is potential output
• u is actual unemployment
• ū is the natural rate of unemployment
• β is a constant derived from regression show the link between deviations from natural output & natural unemployment.

References

1. ^ Richard G. Lipsey and Alec Chrystal. Economics. Oxford University Press. 11th edition. January 2007. p. 423.

See also

• Phillips Curve
• ZIRP

External links

• Tutor2u's description