What Is a Recessionary Gap? - Definition & Graph

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  • 0:04 Actual vs. Potential…
  • 1:25 Why Do Recessions Occur?
  • 2:07 United States GDP 2000-2020
  • 3:01 Lesson Summary
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Lesson Transcript
Instructor: Lucinda Stanley

Lucinda has taught business and information technology and has a PhD in Education.

In this lesson, we'll learn the definition of the macroeconomic term recessionary gap and what it means for the economy. We'll explore reasons recessionary gaps occur and take a look at how a recessionary gap is represented on graphs.

Actual vs. Potential Economic Gap

A recessionary gap, or contractionary gap, is a macroeconomic term which refers to the difference between actual and potential production in an economy. A country's gross domestic product (GDP) is a calculation of how much an economy is producing and is used to compare growth between countries from year to year. A recession is a slowdown of economic activities which lowers a nation's GDP. An economy not in equilibrium, or operating at its optimum production potential, is experiencing a contractionary gap in the business cycle.

The business cycle refers to the fluctuations of an economy's GDP. It has four periods: trough, growth (recovery), peak and recession. Trough periods are the lowest point in the business cycle. This occurs when production is low and unemployment is high. Growth periods come after the trough period and refer to the time when production is increasing and unemployment is decreasing. The peak period is at the top of the business cycle when production is at its highest and unemployment is at its lowest. Finally, in the recession period, production is decreasing and unemployment is increasing.

Why Do Recessions Occur?

When consumers aren't demanding all of the supply that a business is creating, businesses will decrease, or contract production. They could produce more, but why would they? They would then suffer financial losses. Often this reduction in production is most keenly felt in employment rates. If businesses can't produce as much as they're able to for fear of losses, they also don't need as many workers. That generally means they're going to reduce staff. This, in turn, worsens the recession because people who want to work can't find jobs, and if they aren't working, they aren't making any money and therefore can't buy as many products, thus reducing the demand for them.

United States GDP 2000-2020

The following graph shows the real and potential GDP graphed from 2000 through 2015 and beyond.

Recessionary Gap Graph
Recessionary Gap Graph

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