Output Gap
The difference between actual economic output and the economy's potential output.
What is Output Gap?
The output gap measures the difference between an economy's actual GDP and its estimated potential GDP — the level of output it could sustain with full employment of all resources. A positive output gap ('above potential') occurs during economic booms: demand is high, unemployment is low, and inflationary pressure tends to build. A negative output gap ('below potential' or 'recessionary gap') occurs during downturns: resources are underused, unemployment is elevated, and there is downward pressure on prices and wages. Central banks and fiscal policymakers use the output gap to calibrate how much stimulus or restraint the economy needs.
Example
During the COVID-19 recession in 2020, the US output gap fell to approximately -3.5% of potential GDP as economic activity collapsed. Policy response — including nearly $5 trillion in fiscal stimulus and near-zero Fed interest rates — helped close the gap rapidly; by 2021–2022, some estimates suggested the economy was briefly running above potential, contributing to inflation.