Definition
A recessionary gap, also called a contractionary gap, is the amount by which an economy's actual output falls below its potential output, the level it could sustain at full employment. It signals that resources, especially labor, are sitting idle.
The gap is the macroeconomic symptom of a recession. When real GDP runs below potential, factories operate below capacity and unemployment rises above its natural rate.
Why it matters
How it works
Potential output reflects the economy's productive capacity given its workforce, capital, and technology. When aggregate demand falls short of this capacity, output settles below potential and a recessionary gap opens.
Policymakers respond with expansionary measures: governments may cut taxes or raise spending, and central banks may lower interest rates or use quantitative easing. The aim is to lift aggregate demand back toward potential. The opposite case, output above potential with overheating, is an inflationary gap.