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What is the difference between potential and actual GDP?

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Quick Answer

The difference between the potential and actual gross domestic product (GDP) is known as the output gap, or GDP gap, according to the Economic Policy Institute. The potential GDP is a country's maximum, ideal production with high employment across all sectors of the economy while maintaining currency and price stability. Real GDP is the actual measured economic output for a country over a given interval.

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Full Answer

The GDP gap or output gap is considered a measure of a wasteful economic model. Inefficiencies, unemployment and economic crises dampen actual GDP figures. The Economic Policy Institute's figures for 2000-2013 show real GDP and potential GDP to be closely matched until the 2008 recession. The output gap for 2013 was measured to be $868 billion of wasted potential due to the recovering economy.

The Congressional Budget Office (CBO) revised its potential GDP calculations downward due to the recession. In January 2007, the CBO predicted the potential GDP for 2012 to be near $17 trillion. Revised figures released in February 2014 show the potential of economic output to be near $16 trillion, a difference of $1 trillion. The actual GDP for 2012 was near $15 trillion. The CBO revised its prediction of potential GDP downward by 7.3 percent from 2007 to 2014.

Congress estimates potential output by analyzing data for capital, productivity, labor and actual GDP. The downward revision moving forward took into account decreases in labor hours, capital services and total factor productivity.

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