Recessionary Gap

What is a 'Recessionary Gap'

A recessionary gap is 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.

BREAKING DOWN '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. Above Full-Employment Equilibrium

    A macroeconomic term used to describe the real gross domestic ...
  2. Inflationary Gap

    A macroeconomic condition that describes the distance between ...
  3. Okun Gap

    A macroeconomic term that describes the situation when an economy's ...
  4. Below Full Employment Equilibrium

    A macroeconomic term used to describe a situation where an economy's ...
  5. General Equilibrium Theory

    General equilibrium theory studies supply and demand fundamentals ...
  6. Induced Taxes

    Within the context of macroeconomics and fiscal policy, a type ...
Related Articles
  1. Economics

    Macroeconomics: Economic Performance and Growth

    By Stephen Simpson Income is one of the most significant factors in measuring economic performance, and gross domestic product (GDP) is the most commonly used measure of a country's economic ...
  2. Bonds & Fixed Income

    Tips For Recession-Proofing Your Portfolio

    Find out what to do when the sun sets on a burgeoning market.
  3. Options & Futures

    Explaining The World Through Macroeconomic Analysis

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

    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.
  5. Term

    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.
  6. Professionals

    Nominal vs. Real GDP, and the GDP Deflator

    CFA Level 1 - Nominal vs. Real GDP, and the GDP Deflator
  7. Professionals

    Introduction

    CFA Level 1 - Section 4: Introduction to Macroeconomics
  8. Professionals

    Fiscal Policy Basics

    CFA Level 1 - Fiscal Policy Basics
  9. Forex Education

    Playing The Gap

    Learn how you can earn money by analyzing the disruptions in normal price patterns.
  10. Forex

    Gaps

    Those who study the underlying factors behind a gap and correctly identify its type can often trade with a high probability of success.
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. 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 >>
  3. 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 >>
  4. Is the nominal value of GDP a sufficient metric for measuring the economy's health?

    Find out whether the nominal value of gross domestic product is sufficient for measuring the health of an economy and how ... Read Answer >>
  5. 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 >>
  6. 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 >>
Hot Definitions
  1. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  2. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  3. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  4. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  5. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  6. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
Trading Center