Loading the player...

What is an 'Inflationary Gap'

An inflationary gap is a macroeconomic condition that describes the distance between the current level of real gross domestic product (GDP) and full employment (long run equilibrium) real GDP. The inflationary gap is so named because the relative increase in real GDP causes an economy to increase its consumption, which causes prices to rise in the long run.

BREAKING DOWN 'Inflationary Gap'

According to macroeconomic theory, the goods market determines the level of real GDP, which is shown in the following relationship:

Inflationary Gap



As illustrated above, an increase in consumption expenditure, investments, government expenditure or net exports will cause real GDP to rise in the short run.

RELATED TERMS
  1. Above Full-Employment Equilibrium

    A macroeconomic term used to describe the real gross domestic ...
  2. Below Full Employment Equilibrium

    A macroeconomic term used to describe a situation where an economy's ...
  3. Induced Taxes

    Within the context of macroeconomics and fiscal policy, a type ...
  4. Recessionary Gap

    A term routed in macroeconomic theory that summarizes the situation ...
  5. Real Gross Domestic Product (GDP)

    An inflation-adjusted measure that reflects the value of all ...
  6. Gross Domestic Product - GDP

    The monetary value of all the finished goods and services produced ...
Related Articles
  1. Trading

    Calculating the GDP Price Deflator

    The GDP price deflator adjusts gross domestic product by removing the effect of rising prices. It shows how much an economy’s GDP is really growing.
  2. Trading

    The Delicate Dance of Inflation and GDP

    Investors must understand inflation and gross domestic product, or GDP, well enough to make decisions without becoming buried in data.
  3. Insights

    How The GDP Of The US Is Calculated

    The US GDP may not be a perfect economic measure, but the ability to compare it to prior periods and other countries makes it the most applicable.
  4. Insights

    The GDP and its Importance

    GDP is an accurate indication of an economy's size. Few data points can match the GDP and its growth rate's conciseness.
  5. Insights

    How To Calculate The GDP Of A Country

    We explain how to calculate the GDP of a country using two different approaches.
  6. Insights

    How Is The GDP Of India Calculated?

    India is a front-runner among developing economies. Investopedia explains how India calculates its GDP, an indicator of economic health and performance.
  7. Insights

    Why Investors and Economists Care About GDP

    Gross Domestic Product is the total dollar value of all goods an economy produces over a given time.
  8. Insights

    Explaining The World Through Macroeconomic Analysis

    From unemployment and inflation to government policy, learn what macroeconomics measures and how it affects everyone.
  9. Insights

    How To Calculate The GDP Of A Country

    A nation’s gross domestic product measures the monetary value of all of the goods and services it produces.
RELATED FAQS
  1. What is the benefit of using real GDP over GDP?

    Find out why real GDP allows economists to measure changes in the economic growth or decline of a country more accurately ... Read Answer >>
  2. Is real GDP a better index of economic performance than GDP?

    Learn why real GDP is a better index for expressing the output of an economy, as it takes into account the factors that distort ... Read Answer >>
  3. When do economists use real GDP instead of GDP?

    Learn about the purposes for which economists rely on real GDP. Find out how real GDP is calculated and how it is important ... Read Answer >>
  4. How much of an economy's performance is captured by real GPD?

    Learn about the economic information captured by real GDP. Find out how real and nominal GDP are constructed and the purposes ... Read Answer >>
  5. How are aggregate demand and GDP related?

    See why aggregate demand and gross domestic product (GDP) are necessarily the same thing according to Keynesian macroeconomic ... Read Answer >>
  6. What is GDP and why is it so important to investors?

    The gross domestic product (GDP) is one the primary indicators used to gauge the health of a country's economy. It represents ... Read Answer >>
Hot Definitions
  1. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
  2. Liquidity Event

    An event that allows initial investors in a company to cash out some or all of their ownership shares and is considered an ...
  3. Job Market

    A market in which employers search for employees and employees search for jobs. The job market is not a physical place as ...
  4. Yuppie

    Yuppie is a slang term denoting the market segment of young urban professionals. A yuppie is often characterized by youth, ...
  5. SEC Form 13F

    A filing with the Securities and Exchange Commission (SEC), also known as the Information Required of Institutional Investment ...
  6. Four Percent Rule

    A rule of thumb used to determine the amount of funds to withdraw from a retirement account each year. The four percent rule ...
Trading Center