Recessionary Gap

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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 ...
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