Inflationary Gap


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.


Loading the player...

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.

  1. K-Percent Rule

    A theory of macroeconomic money-supply growth first postulated ...
  2. Net Exports

    The value of a country's total exports minus the value of its ...
  3. Consumption Function

    The consumption function is a mathematical formula laid out by ...
  4. Real Gross Domestic Product (GDP)

    An inflation-adjusted measure that reflects the value of all ...
  5. Recessionary Gap

    A term routed in macroeconomic theory that summarizes the situation ...
  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. Economics

    What Is Inflation?

    Did you know that inflation is silently eating away at your savings? Learn more about this sneaky financial phenomenon and what causes it.
  4. Investing Basics

    Why Interest Rates Affect Everyone

    Learn why interest rates are one of the most important economic variables and how every individual and business is affected by rate changes.
  5. Economics

    Investing Opportunities as Central Banks Diverge

    After the Paris attacks investors are focusing on central bank policy and its potential for divergence: tightened by the Fed while the ECB pursues easing.
  6. Economics

    5 States with the Highest GDP Per Capita

    Learn about the top five states ranked by their real gross domestic product (GDP) per capita as of 2014: Alaska, North Dakota, New York, Connecticut and Wyoming.
  7. Economics

    Understanding Donald Trump's Stance on China

    Find out why China bothers Donald Trump so much, and why the 2016 Republican presidential candidate argues for a return to protectionist trade policies.
  8. Markets

    What Slow Global Growth Means for Portfolios

    While U.S. growth remains relatively resilient, global growth continues to slip.
  9. Markets

    Can Deflation Be Good?

    General economic theory consensus rules that deflation is bad for the economy. But the Swiss economy, which is growing despite a drop in prices for the last four years, is proving otherwise. ...
  10. Investing

    World Bank Data For Dummies

    Developing countries can't always afford to track the data crucial to setting the right economic policies and programs. That's where the World Bank steps in.
  1. Is Israel a developed country?

    Israel is considered a developed country, although it has substantial poverty and large income gaps. The International Monetary ... Read Full Answer >>
  2. Is Spain a developed country?

    Spain is a developed country. Nearly all organizations that analyze development status classify it as such. Spain has a strong ... Read Full Answer >>
  3. Is Malaysia a developed country?

    Despite undergoing rapid economic development over the past five decades, Malaysia is not considered a developed country, ... Read Full Answer >>
  4. Is Chile a developed country?

    As of 2015, Chile is the only country in Latin America that is generally recognized as a developed country. In 2010, the ... Read Full Answer >>
  5. Is Australia a developed country?

    Australia is one of the most developed countries in the world. The nation's per capita gross domestic product (GDP), one ... Read Full Answer >>
  6. Is Nigeria a developed country?

    Nigeria is not a developed country by any reasonable standard. The country's per capita gross domestic product (GDP) is much ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Take A Bath

    A slang term referring to the situation of an investor who has experienced a large loss from an investment or speculative ...
  2. Black Friday

    1. A day of stock market catastrophe. Originally, September 24, 1869, was deemed Black Friday. The crash was sparked by gold ...
  3. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  4. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
  5. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
  6. Black Tuesday

    October 29, 1929, when the DJIA fell 12% - one of the largest one-day drops in stock market history. More than 16 million ...
Trading Center