Equilibrium Gaps

Definition

Equilibrium gaps refer to situations where there is a difference between the actual level of economic activity and the desired or potential level.

Analogy

Think about a student who wants to achieve straight A's but ends up with some B's and C's. The gap between their desired grades (straight A's) and their actual grades represents an equilibrium gap.

Related terms

Recessionary Gap: When the actual level of economic activity falls below the potential or desired level, resulting in high unemployment rates.

Inflationary Gap: When the actual level of economic activity exceeds the potential or desired level, leading to increased inflationary pressures.

Output Gap: The difference between actual GDP and potential GDP, indicating whether an economy is operating above or below its full capacity.