GDP Gap Calculator

Formula

The formula to calculate the GDP gap is:

\[ \text{GDP Gap} = \text{Potential GDP} - \text{Actual GDP} \]

Where:

$ \text{GDP Gap} $ is the difference between potential GDP and actual GDP.
$ \text{Potential GDP} $ is the maximum level of output an economy can produce with full employment of resources.
$ \text{Actual GDP} $ is the current level of output in the economy.

Example

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.

What is a GDP Gap?

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.