What is the difference between real GDP and potential GDP known as?

• A. Output gap
• B. Inflation gap
• C. Productivity gap
• D. Growth gap

Answer: (A)

The difference between real GDP and potential GDP is called the output gap. Real GDP shows what the economy is actually producing, while potential GDP represents the level of output the economy can sustain at full capacity without fueling inflation. When real GDP exceeds potential, an inflationary pressure can build, signaling an overheated economy. When real GDP is below potential, resources are underused, indicating recessionary conditions. The term output gap captures this difference directly. Other terms, like inflation gap, productivity gap, or growth gap, aren’t the standard way to describe the gap between actual and sustainable production.