Recessionary Gap

AAA

DEFINITION of 'Recessionary Gap'

A term routed in macroeconomic theory that summarizes the situation where an economy is operating at below its full-employment equilibrium. Under this condition, the level of real gross domestic product (GDP) is currently lower then it is at full-employment, which puts downward pressure on prices in the long run.

INVESTOPEDIA EXPLAINS 'Recessionary Gap'

A recessionary gap happens when an economy is falling into a recession, which is defined as a lower real level of income (as measured by real GDP) then the full-employment level. An economic recession can happen in a number of ways, including a higher nominal exchange rate, which will reduce net exports and domestic income, and a large reduction in consumer expenditure or investment due to a decrease in take home pay by workers.

RELATED TERMS
  1. Below Full Employment Equilibrium

    A macroeconomic term used to describe a situation where an economy's ...
  2. Real Gross Domestic Product (GDP)

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

    The state in which market supply and demand balance each other ...
  4. Recession

    A significant decline in activity across the economy, lasting ...
  5. GDP Gap

    The forfeited output of a country's economy resulting from the ...
  6. Full Employment

    A situation in which all available labor resources are being ...
RELATED FAQS
  1. What are defensive stocks?

    The term defensive stocks is synonymous to non-cyclical stocks, or companies whose business performance and sales are not ... Read Full Answer >>
  2. When has the United States run its largest trade deficits?

    In macroeconomics, balance of trade is one of the leading economic metrics that determines the trading relationship of a ... Read Full Answer >>
  3. How does the risk of investing in the industrial sector compare to the broader market?

    There is increased risk when investing in the industrial sector compared to the broader market due to high debt loads and ... Read Full Answer >>
  4. What portion of the global economy is comprised of the telecommunications sector?

    With global gross domestic product, or GDP, calculated at approximately $77 trillion for 2014, and the telecommunications ... Read Full Answer >>
  5. How can I hedge my portfolio to protect from a decline in the retail sector?

    The retail sector provides growth investors with a great opportunity for better-than-average gains during periods of market ... Read Full Answer >>
  6. What is the correlation between term structure of interest rates and recessions?

    There is no question that interest rates have enormous macroeconomic importance. Many economists and analysts believe the ... Read Full Answer >>
Related Articles
  1. Investing

    The Ups And Downs Of Investing In Cyclical Stocks

    This strategy can be profitable but only if you know when to dump these stocks.
  2. Bonds & Fixed Income

    The Impact Of An Inverted Yield Curve

    Find out what happens when short-term interest rates exceed long-term rates.
  3. Personal Finance

    How The Federal Reserve Manages Money Supply

    Find out how the Fed manages bank reserves and this contributes to a stable economy.
  4. Bonds & Fixed Income

    Tips For Recession-Proofing Your Portfolio

    Find out what to do when the sun sets on a burgeoning market.
  5. Active Trading Fundamentals

    Recession: What Does It Mean To Investors?

    Understanding the business cycle and your own investment style can help you cope with an economic decline.
  6. Mutual Funds & ETFs

    Survival Tips For A Stormy Market

    Learn which stocks to watch and which to avoid when the Dow starts to sink.
  7. Investing

    Impact of the Chinese Economy on the U.S. Economy

    The economic growth of China has been decreasing since 2010. What impact does this have on the US and the world economy?
  8. Bonds & Fixed Income

    Dodd-Frank Creates a Liquidity Crunch for Bonds

    While each individual institution is undoubtedly safer due to capital constraints imposed by Dodd-Frank, this makes for a more illiquid market overall. The lack of liquidity will be especially ...
  9. Personal Finance

    10 Jobs to Avoid Right Now

    These jobs may never recover to pre-recession highs, can easily be outsourced overseas or may disappear altogether as technology intervenes.
  10. Economics

    Will the Selloff in China Hurt the Global Economy?

    Though China is the world’s second largest economy, its volatility in the stock market is unlikely to have an impact on the global or Chinese economy.

You May Also Like

Hot Definitions
  1. OsMA

    An abbreviation for Oscillator - Moving Average. OsMA is used in technical analysis to represent the variance between an ...
  2. Investopedia

    One of the best-known sources of financial information on the internet. Investopedia is a resource for investors, consumers ...
  3. Unfair Claims Practice

    The improper avoidance of a claim by an insurer or an attempt to reduce the size of the claim. By engaging in unfair claims ...
  4. Killer Bees

    An individual or firm that helps a company fend off a takeover attempt. A killer bee uses defensive strategies to keep an ...
  5. Sin Tax

    A state-sponsored tax that is added to products or services that are seen as vices, such as alcohol, tobacco and gambling. ...
  6. Grandfathered Activities

    Nonbank activities, some of which would normally not be permissible for bank holding companies and foreign banks in the United ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!