GDPgap or the output gapis the difference between potential GDPand actual GDPor actual output. The calculation for the output gap is Y-Y* where Y is potential output and Y* is actual outputor the natural level of output. If this calculation yields a positive number it is called a recessionary gap and indicates an economy in expansion; if the calculation yields a negative number it is called a expansionary gap and indicates an economy in recession.
The percentage GDP gap is the potential GDP minus the actual GDP divided by the actual GDP. .
GDP Gap & Unemployment - Okun's Law
Okun's Lawis based on regression analysis of US data that shows a correlation between unemployment and GDP. Okun's law can be stated as: For every 2% increase in potential GDP, the actual employment rate exceeds the natural rate of employment by 1% of the potential GDP.
This can also be expressed as:
(Y-Y*) / Y*= - β(u-ū)
*Y is actual output
*Y* is potential output
*u is actual unemployment
*ū is the natural rate of unemployment
*β is a constant derived from regression show the link between deviations from natural output & natural unemployment.
* [http://www.tutor2u.net/economics/content/topics/macroeconomy/outputgap.htm Tutor2u's description]
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