Inflationary Gap

If you’re a macroeconomist who wants to grumble about the current state of the economy, look no farther than the inflationary gap: the hypothetical gap based on hypothetical full employment vs actual employment.

The inflationary gap is hypothetical GDP if the workforce was currently at full employment (which means everyone who wants a job has one) minus the current real GDP.

If current real GDP is higher than GDP would be at full employment, it means the gap between the two is made up of inflation. A nation’s central bank may decide to decrease the amount of money in circulation to keep that inflation in check.