what is a gdp gap 
a gdp gap is the difference between the actual gross domestic product gdp and the potential gdp of an economy as represented by the long term trend a negative gdp gap represents the forfeited output of a country s economy resulting from the failure to create sufficient jobs for all those willing to work a large positive gdp gap on the other hand generally signifies that an economy is overheated and at risk of high inflation the difference between real gdp and potential gdp is also known as the output gap understanding a gdp gapa gdp gap can be positive or negative and is calculated as a c t u a l g d p p o t e n t i a l g d p p o t e n t i a l g d p actual gdp potential gdp potential gdp actualgdp potentialgdp potentialgdpfrom a macroeconomic perspective you want the smallest possible gdp gap and preferably no gap at all a negative gap shows that an economy is operating at less than its full potential it s underperforming and essentially leaving money on the table from where it should be trend wise here production and value are irretrievably lost due to a shortage of employment opportunities negative gdp gaps are common after economic shocks or financial crises the negative gdp gap in this case is mostly a reflection of a hesitant business environment companies are unwilling to spend or commit to increased production schedules until stronger signs of a recovery are present this in turn leads to less hiring and perhaps even continued layoffs in all sectors that said a positive gdp gap is also problematic a large positive gdp gap may be a sign that the economy is overheated and heading toward a correction the larger the positive gdp gap the more likely it is that an economy is at risk of a period of high inflation at the very least example of a gdp gapaccording to the bureau of economic analysis bea the actual gdp in the united states for the fourth quarter of 2020 was 20 93 trillion 1 the federal reserve bank of st louis has its own real potential gdp in 2012 dollars adjusted to 2020 dollars it projected a potential gdp of 19 41 trillion 2running this through the formula 20 93 19 41 19 41 we get a positive gdp gap of about 0 8 that is near ideal from the perspective of sustainable economic growth however this represents just a moment in time policymakers watch the gdp gap closely and make adjustments to try and keep growth in line with the long term trend gdp gaps between nationsthe term gdp gap is also applied more simply to describe the difference in gdp between two national economies in recent years an increasing amount of attention has been paid to the gdp gap between the united states the world s largest economy in terms of gdp and china in 2020 this gdp gap was estimated to be around 5 9 trillion which while significant still represents a rapid closing in by china over the last decade 3china has been making up ground since the great recession with its huge infrastructure investments and also bounced back quicker than the u s from the 2020 economic crisis current projections anticipate that china could overtake the u s economy in gdp terms by 2028 however other economists are less convinced arguing that an aging population and growing debt pile could keep china confined to second place 3