Recessionary Gap

Recessionary Gap is a situation wherein the real GDP is lower than the potential GDP at the full employment level. This is a situation wherein the real GDP is lower than the potential GDP at the full employment level. The economy operates below the full employment level in a recessionary gap.

Description: Recessionary gap is also termed as contractionary gap. An economy doesn’t necessarily operate at the full employment level. So the difference that exists between the potential full employment equilibrium and the actual ones is the recessionary gap.

This recessionary gap pushes prices down in the long term. Recession refers to a general slowdown in economic activities, i.e. a business cycle contraction.

Generally, a recessionary gap occurs when an economy is approaching recession. So it is also associated with business cycle contraction.