GDP Gap

GDP Gap: Meaning, Calculation, and Example

Key takeaways

• The GDP gap (or output gap) is the difference between actual GDP and potential GDP.
• A negative gap indicates underused resources and slack in the economy; a positive gap indicates the economy may be overheating.
• Policymakers monitor the GDP gap to guide fiscal and monetary policy aimed at stabilizing growth and inflation.
• The term is also used more loosely to describe the difference in GDP between countries.

What is the GDP gap?

The GDP gap measures how far an economy’s actual output (real GDP) deviates from its potential output—the level of GDP consistent with full use of labor and capital over the long term. It shows whether an economy is operating below or above its sustainable capacity.

How it’s calculated

GDP gap = (Actual GDP − Potential GDP) / Potential GDP

A negative value means output is below potential (economic slack). A positive value means output exceeds potential (possible overheating and inflationary pressure).

Interpreting the gap

• Negative gap: Common after recessions or shocks. Reflects reduced production, higher unemployment, and weak business investment. Policy responses often aim to stimulate demand and job creation.
• Positive gap: Suggests demand is outpacing sustainable supply, increasing the risk of inflation. Policymakers may tighten monetary or fiscal policy to cool the economy.
• Ideally, the gap is close to zero—sustained large deviations in either direction can be harmful.

Example

Using publicly reported figures for the United States in late 2020:
* Actual GDP (Q4 2020): $20.93 trillion
* Estimated potential GDP (adjusted to 2020 dollars): $19.41 trillion

GDP gap = (20.93 − 19.41) / 19.41 ≈ 0.078, or about 7.8% positive

This snapshot illustrates how the gap quantifies the distance between current output and the long-run trend; policymakers monitor such measures over time to assess whether adjustments are needed.

GDP gaps between countries

The term is also used to compare total GDPs across nations. For example, the U.S.–China GDP difference has drawn attention as China has rapidly closed the gap over recent decades. Estimates around 2020 put the U.S. lead at several trillion dollars, and projections differ on whether and when China might surpass the U.S., with factors such as demographics, investment, and debt influencing outcomes.

Conclusion

The GDP gap is a concise indicator of economic slack or overheating. It helps policymakers and analysts assess cyclical conditions and the likely direction for monetary and fiscal policy. Tracking the gap over time—alongside other indicators—guides efforts to maintain stable growth and low inflation.