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 potential output and Y* is actual output
or the natural level of output. If this calculation yields a positive number it is called a recessionary gap and indicates an economy in expansion; if the calculation yields a negative number it is called a expansionary gap and indicates an economy in recession.
The percentage GDP gap is the potential GDP minus the actual GDP divided by the actual GDP.
GDP Gap & 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 2% increase in potential GDP, the actual employment rate exceeds the natural rate of employment by 1% of the potential GDP.
%Output gap = -β x %Cyclical unemployment
This can also be expressed as:
(Y-Y*) / Y*= - β(u-ū)
- 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.