Output gap

The GDP gap or the output gap is the difference between actual GDP or actual output and potential GDP. 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.

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

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

February 2013 data from the Congressional Budget Office showed that the United States had a projected output gap for 2013 of roughly $1 trillion, or nearly 6% of potential GDP.

Okun's law is based on regression analysis of U.S. 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%.

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