GDP gap Totally Explained

Everything about Gdp Gap totally explained

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's called a recessionary gap and indicates an economy in expansion; if the calculation yields a negative number it's 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.

(potential GDP - actual GDP)/actual GDP

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.

%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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