The real GDP in a country was 1200 and the potential GDP was

The real GDP in a country was 1,200 and the potential GDP was 1340. In this country the GDP gap was approximately?

Solution

Actual real GDP = 1,200

Potential real GDP = 1,340

Calculate GDP gap -

GDP gap = Actual real GDP - Potential real GDP

              = 1,200 - 1,340

              = -140

In this country, the GDP gap was approximately -140.

This negative GDP gap indicates that economy is in recession.