4.7: Full Employment GDP versus Equilibrium GDP
Read this article, focusing your attention on the two types of GDP: full employment and equilibrium. You should be able to draw distinctions between these two types after reading this article. Full employment GDP occurs near what this reading refers to as potential GDP - where the long-run aggregate supply curve is vertical. In contrast, equilibrium GDP occurs where the short-run aggregate supply curve intersects the aggregate demand curve. Output gaps occur when the three curves intersect at different points.
The recessionary gap occurs to the left of long-run equilibrium in a graph depicting the aggregate demand, short-run aggregate supply, and long-run aggregate supply curves. In short, it means the business cycle is in a contractionary phase with high unemployment, low output, and low income levels.
The inflationary gap occurs to the right of long-run equilibrium in a graph depicting the aggregate demand, short-run aggregate supply, and long-run aggregate supply curves. In short, it means the business cycle is in a contractionary phase with high unemployment, low output, and low income levels.