What is the term for the difference between an economy’s actual output and its potential output? It is the output gap.
The output gap compares what an economy is producing with what it could sustainably produce using its labor, capital, technology, and institutions without creating excessive inflation. It is often stated as a percentage of potential output: (actual output − potential output) divided by potential output, multiplied by 100. Actual output below potential produces a negative gap; output above potential produces a positive gap.
A negative gap is commonly called a recessionary gap and usually signals unused workers, factories, and other resources. A positive gap is sometimes called an inflationary gap because demand may be pressing against available supply. Those terms describe types or implications of an output gap, but they are not the general name for the concept.
Potential output is not directly observable. Economists estimate it using models, trends, and information about productivity and labor markets, so output-gap estimates can be revised and disputed. The idea is also associated with Okun’s law, which describes a statistical relationship between output gaps and cyclical unemployment.