What Is a Recessionary Gap?

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 澳洲幸运5官方开奖结果体彩网:full employment.

Understanding a Recessionary Gap

Essentially, a recessionary gap refers to the difference between actual and potential production in an economy, with the actual being lower than the potential, which puts downward pressure on prices in the long run. Often, these gaps are evident during an economic downturn and are associated with 澳洲幸运5官方开奖结果体彩网:higher unemployment numbers.

Significant reductions in economic activity for several months will indicate a 澳洲幸运5官方开奖结果体彩网:recession. During periods of recession, companies will often pull back on spending, creating a gap from the contraction in the 澳洲幸运5官方开奖结果体彩网:business cycle.

Economists define a recessionary gap as a lower, real-income level, as measured by real GDP, than the real-income level at a point of full employment. Real GDP values all goods and services for a specific time-frame, adjusted for 澳洲幸运5官方开奖结果体彩网:inflation. In the period leading up to a recession, there is often a significant reduction in consumer expenditure or investment due to a decrease in the take-home pay 𝔍of workers.

Recessionary Gaps and Exchange Rates

When production levels fluctuate, prices change to compensate. This price change is considered an early indicator that an economy is moving into a recession and may lead to less favorable 澳洲幸运5官方开奖结果体彩网:exchange rates for foreign currencies.

An exchange rate is merely one country's currency in comparison with that of another country. At parity, the two currencies exchange one for one.

Countries might adopt 澳洲幸运5官方开奖结果体彩网:monetary policies to lower rates in an effort to encourage foreign investment or raise rates to encourage internal consumption of homemade products. The change in exchange rates affects the financial returns on exported goods. Lower foreign exchange rates mean less income for exporting countries and further drives a rece♏ssionary trend.

Offsetting Recessionary Gaps

Although it represents a downward economic trend, a recessionary gap can remain stable, suggesting short-term economic 澳洲幸运5官方开奖结果体彩网:equilibrium below the ideal, which can be as damaging to an economy as an unstable period. This instability is because prolonged downward periods of lower GDP production inhibit growth and contribute to sustained higher 澳洲幸运5官方开奖结果体彩网:unemployment levels.

Policymakers may choose to implement an 澳洲幸运5官方开奖结果体彩网:expansionary policy—a stabilization policy—to 澳洲幸运5官方开奖结果体彩网:close the gap and increase real 🔯GDP. Monetary authorities might increase the amount of money in circulation in the economy by lowering 澳洲幸运5官方开奖结果体彩网:interest rates and boosting government spending.

The Recessionary Gap and Unemployment

A more important outcome of a recessionary gap is increased unemployment. During an economic downturn, the demand for goods and services lowers as unemployment rises. If prices and wages remain unchanged, ꧑this can fu🌱rther elevate unemployment levels.

In a cycle which feeds upon itself, higher unemployment levels reduce overall consumer demand, which reduces production, and lowers the realized GDP. As the amount of output continues to fall, fewer employees are required to meet production demand, resulting in additional job losses and further reducing the nee🏅d for goods and services.

As a company's profits stagnate or decline, it cannot offer higher wages. Some industries may experience pay cuts due to internal business practices, or the effect of economic circumstances. For example, during a recession, people spend less on✃ going out to eat, which means that restaurant workers receive less income in the form of tips.

Recessionary Gap Example

In December 2018, the U.S. labor market as a whole was at full employment with an unemployment rate of 3.9% and there was no recessionary gap. However, not 🌄all parts of the country were at full employment, and some individual states were experiencing a 🔯recessionary gap.

For instance, New York was at full employment, and most large cities were economically secure. However, the picture was very different in rural areas where jobs were more difficult to find. In West Virginia, for example, the decimated coal mining industry brought the unemployment rate to 5.3% with little economic productivity. Additionally, West Virginia was the fourth highest state with a poverty rate around 18%.