Definition of Recessionary Gap

Recessionary gap is a state in which the real Gross Domestic Product (GDP) is less than the potential GDP when the employment level is full. During recessionary gap, economy functions below the full employment level.

Explanation of Recessionary Gap

Another term used for recessionary gap is contractionary gap which means that recession is near. It basically happens when the economy is working at a level below the potential full-employment level and the real GDP is lower than the potential GDP. The investments decrease during this period as the take home income or real income decreases and unemployment increases.