What is Recessionary Gap?
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A recessionary gap, or contractionary gap, is a macroeconomic term used when a country's real gross domestic product (GDP) is lower than its GDP at full employment.
Definition
The recessionary gap, also known as the contractionary gap, is a macroeconomic term that refers to the situation where a country's actual Gross Domestic Product (GDP) is lower than its GDP at full employment. This indicates that the economy is not fully utilizing its resources, resulting in output below its potential level.
Origin
The concept of the recessionary gap originated from Keynesian economics, particularly during the Great Depression of the 1930s. Keynesians believe that government intervention can help close this gap by boosting demand to stimulate economic growth.
Categories and Features
The recessionary gap can be categorized based on its duration and severity. Short-term gaps are often caused by cyclical factors, such as natural fluctuations in the economic cycle. Long-term gaps may indicate structural issues, such as labor market rigidities or technological lag. Features include rising unemployment rates, deflationary pressures, and reduced investment.
Case Studies
A typical case is the significant recessionary gap experienced by the United States following the 2008 global financial crisis. The government implemented fiscal stimulus packages and monetary policy interventions to close the gap. Another example is Japan's "Lost Decade" in the 1990s, where the bursting of an asset bubble led to prolonged economic stagnation and a persistent recessionary gap.
Common Issues
Investors might misunderstand the short-term and long-term impacts of a recessionary gap. Short-term gaps can often be quickly addressed through policy interventions, while long-term gaps may require structural reforms. Another common misconception is confusing the recessionary gap with a recession itself; the former is a measurement tool, while the latter is an economic condition.
