Recessionary gap (negative output gap)
Definition
A recessionary gap, also known as a negative output gap, occurs when the actual level of output falls below the potential GDP due to insufficient aggregate demand.
Analogy
Imagine a pizza shop with empty tables during lunchtime. A recessionary gap is like having fewer customers than the restaurant's capacity, resulting in unused tables and potential lost revenue.
Related terms
Potential GDP: The maximum level of real GDP that can be produced by an economy when all resources are fully utilized.
Aggregate Demand (AD): The total demand for goods and services in an economy at a given price level.
Output Gap: The difference between actual output and potential output in an economy.
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