What is the difference between actual GDP and potential GDP called?

Okay, so you’re wondering about the difference between actual GDP and potential GDP, right? It’s a pretty important thing to understand, especially if you, like me, ever find yourself staring blankly at economic news. I mean, who doesn’t want to grasp these concepts?

Anyway, the difference? It’s called the output gap. Think of it like this: potential GDP is what the economy could produce if everything was running perfectly – everyone’s employed, factories are humming, and there are no weird supply chain hiccups. Actual GDP, on the other hand, is what’s actually being produced. It’s the reality, the messy, imperfect reality.

A positive output gap? That’s like a party! Actual GDP is higher than potential. The economy’s booming, maybe even overheating a bit. Remember that crazy summer of ’07 when I got a job and a bonus, felt like the whole world was making money? Probably a positive output gap situation then, haha. A bit scary to think about the crash after, though.

A negative output gap, though… that’s a bummer. That means we’re producing less than we could be. Think of all those skilled workers sitting on the sidelines during those bleak months in 2020, when the pandemic hit, remember? My uncle, a construction worker, was out of work for months. It was rough. That’s a classic example of a negative output gap – lost production, wasted potential. So, yeah, the output gap is a pretty good indicator of where the economy’s at, overall, wouldn’t you say?

#Actual #Gdp #Potential