The GDP gap measures the amount by which
A) nominal GDP exceeds real GDP.
B) actual GDP exceeds equilibrium GDP.
C) potential GDP exceeds actual GDP.
D) actual GDP exceeds national income.

Question

Quizplus · Accepted Answer

The GDP gap measures the difference between potential GDP (the level of output that could be produced if all resources were utilized at their full potential) and actual GDP (the level of output that is actually produced in the economy). Therefore, option C is the correct answer. Option A is incorrect because it refers to the difference between nominal GDP (which includes the effects of inflation) and real GDP (which adjusts for inflation), not the GDP gap. Option B is incorrect because equilibrium GDP refers to the level of output that is consistent with aggregate demand and supply, which may or may not be the same as actual GDP. Option D is also incorrect because national income is a narrower concept than GDP (which includes all market transactions, including trade of intermediate goods), and therefore may not reflect the full gap between potential and actual output in the economy.

The GDP Gap Measures the Amount by Which