Inflationary Gap

AAA

DEFINITION of 'Inflationary Gap'

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.

INVESTOPEDIA EXPLAINS '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.

VIDEO

Loading the player...
RELATED TERMS
  1. Net Exports

    The value of a country's total exports minus the value of its ...
  2. Real Gross Domestic Product (GDP)

    An inflation-adjusted measure that reflects the value of all ...
  3. Consumption Function

    The consumption function is a mathematical formula laid out by ...
  4. Recessionary Gap

    A term routed in macroeconomic theory that summarizes the situation ...
  5. K-Percent Rule

    A theory of macroeconomic money-supply growth first postulated ...
  6. Okun Gap

    A macroeconomic term that describes the situation when an economy's ...
Related Articles
  1. Options & Futures

    The Consumer Price Index: A Friend To Investors

    As a measure of inflation, this index can help you make key financial decisions.
  2. Options & Futures

    Introduction To Inflation-Protected Securities

    Inflation is an enemy to investors - except to those who invest in IPS, which guarantee a real rate of return with no credit risk.
  3. Mutual Funds & ETFs

    GLD vs. IAU: Which Gold ETF is Better?

    Looking to play gold with ETFs? A look at SPDR Gold Trust Shares (GLD) versus iShs Gold Trust Trust Units (IAU).
  4. Economics

    What is the Income Effect?

    In economics, the income effect is the change in the consumption of goods caused by a change in income, whether income goes up or down.
  5. Economics

    What Do You Need To Know About Inflation?

    When it comes to inflation, there is no shortage of opinions: one side argues the Fed should raise rates, and the opposition says the Fed should stay put.
  6. Economics

    What’s Missing For A Turnaround In Brazil?

    Today, many investors have written off Brazil following several years of poor performance, decelerating growth and chronically high inflation.
  7. Options & Futures

    Why Gold's Price is More than 'Supply and Demand'

    The price of gold is moved by a combination of factors. But the way they work together is sometimes counterintuitive.
  8. Savings

    The Top Ten Economic Indicators In The UK

    We list below ten key economic indicators for the United Kingdom, the world’s 6th-largest economy.
  9. Economics

    What's Aggregate Demand?

    Aggregate demand is a macroeconomic term describing the total demand in an economy for all goods and services at any given price level in a given time period.
  10. Mutual Funds & ETFs

    These 4 Precious Metals ETFs Help Combat Inflation

    A look at 4 precious metal ETFs to combat inflation when it hits.

You May Also Like

Hot Definitions
  1. Income Effect

    In the context of economic theory, the income effect is the change in an individual's or economy's income and how that change ...
  2. Price-To-Sales Ratio - PSR

    A valuation ratio that compares a company’s stock price to its revenues. The price-to-sales ratio is an indicator of the ...
  3. Hurdle Rate

    The minimum rate of return on a project or investment required by a manager or investor. In order to compensate for risk, ...
  4. Market Value

    The price an asset would fetch in the marketplace. Market value is also commonly used to refer to the market capitalization ...
  5. Preference Shares

    Company stock with dividends that are paid to shareholders before common stock dividends are paid out. In the event of a ...
  6. Accrued Interest

    1. A term used to describe an accrual accounting method when interest that is either payable or receivable has been recognized, ...
Trading Center