 # 17k: Recessionary gap: what is it?

I’m having trouble understanding what a recessionary gap is and how it relates to a “recession”. From what I gather, a recession is when a nation is producing less (lower GDP) this quarter than it did in the previous quarter.

It says in the Schweser text that a recessionary GAP is when the GDP is lower than the “potential GDP”. Well if we go by that logic, isn’t there always a recessionary gap since we are never at 0% unemployment? If that’s true, how would you ever calculate potential GDP accurately?

From what I recall, you can never calculate “true” potential GDP. You can only estimate it. The potential GDP is the point where the unemployment rate is at its natural rate of unemployment (NARU). Again, NARU can only be estimated. Since we cannot accurately calculate NARU, we can never calculate true potential GDP.

You are assuming NARU to be at 0% in your example. We don’t know what is the level of NARU. Suppose, NARU is 4% and the actual unemployment rate is 6%, then there is a recessionary gap and if the actual unemployment rate is 1%, then there is an inflationary gap.

And a common definition for recession is “two consecutive quarters of negative GDP”.