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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. ## GDP Gap & Unemployment - Okun's Law

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.## External links

The percentage GDP gap is the potential GDP minus the actual GDP divided by the actual GDP. $(potential\; GDP\; -\; actual\; GDP)/actual\; GDP$.

%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.

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Last updated on Monday September 08, 2008 at 02:08:05 PDT (GMT -0700)

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This article is licensed under the GNU Free Documentation License.

Last updated on Monday September 08, 2008 at 02:08:05 PDT (GMT -0700)

View this article at Wikipedia.org - Edit this article at Wikipedia.org - Donate to the Wikimedia Foundation

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