Key points
- Positive gap (actual > potential) = overheating, inflation risk.
- Negative gap (actual < potential) = slack, disinflation pressure.
- Estimates are backward-looking and uncertain; difficult to observe in real time.
Example
If potential GDP is $28T and actual GDP is $27.8T, the -0.7% output gap suggests economic slack and room for growth without inflation.
In history
Post-2008, potential GDP estimates were revised down; 2020 recession created large negative gap that closed faster than expected by 2023.
Related terms