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Recessionary Gap (Definition) | Effects | Top Causes of Recessionary Gap - YouTube
Channel: WallStreetMojo
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hello everyone hi welcome to the channel
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clicking the bell ican today we have a
topic with us is called recessionary gap
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now what exactly this is all about over
it's the recession first over here
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there's a dialogue box showing us the
definition it is a gap that can be
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defined as a difference between the real
GDP and the potentials the GDP data that
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should have been possible at the full
employment level so this is also known
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as a contractionary gap try and get into
the deeper note in this particular thing
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first the real GDP is always it's gonna
out weighted it by the potential GDP
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remember this because the aggregate
output of the economy is always lower
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than the aggregate output that would
have opted in the full employment level
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now in simpler words we can say that
this is the gap between the actual
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production and the full employment
output when the actual output is here
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than the natural level of output the
recessionary graph in order depicts you
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know the situation and it is the
economic situation where the real GDP
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real GDP is actually lower than the
natural GDP now the economy faces a
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recessionary gap when the real output is
lower than the expected as shown so the
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aggregate demand of the shorter
aggregate supply of intersects the point
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left to the LRS I will show you that
graph the graph looks something like
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this you see over here the aggregate
demand and the short-run aggregate
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supply SRS it intersects the point of
LRAS that is the long-run aggregate
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supply and you
can see the bid depicted how things work
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this is LRAS and SRS and this is
the midpoint so let me give you've used
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some explanation on why this kind of a
recessionary gap comes see when a
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recession happens when the economy is
not reaching its full potential there
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comes a recessionary gap and it measures
the difference between where the economy
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where the economy is and where the
economics should be so the idle
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situation will prevail when the economy
is in the long run equilibrium okay
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where all the resources are utilized to
their maximum and most efficient
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capacity so it should be kept in mind
that you know the ideal economic does
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not mean zero unemployment factories
running 24 hours 7 days a week and
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in such a situation the natural
unemployment rate should be there which
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includes individuals who are unemployed
because they are in transition also the
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factory will have a down time they will
have the down time for maintenance or a
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up gradation so this is a pointer this is
pointed out that economy is operating
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below the full employment level always
believed that and thereby leading to our
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downfall of the general price level in
the long term so it comes into the
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forefront during the times of the
economic downturn and related to the
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hire and employment numbers so although
it implies economic downturn it can
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remain stable suggests you know or
short-term economic which may be
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damaging to an economy as an unstable
period so this happens because of the
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long period or lower GDP production and
inhibits you know the growth is the main
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contributor - you can say that - the
sustained hire and employment levels so
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since production level changes to
basically compensate it the prices also
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changes so this is the sign that the
economy is moving
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into a recession and may lead to
unfavorable exchange dates for our
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foreign currencies now when an exchange
rate for foreign currency is affected it
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also affects the financial returns on
the exported goods so the lower return
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on the exported good contributed less
towards the exporting countries GDP and
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further it acts as a catalyst to the
recessionary trend now I'll take you to
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the causes spot what leads to this see
the mean mainly it happens due to the
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inefficient you can say allocation of
resources thus resulting you know in
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downturn in the economy as a situation
the firm's have lower profit and are
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bound to lay off more workers so this
leads to an increase in unemployment
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does you know decreasing the consumer
spending it leads to the consumer
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spending in the aggregate demands when
their long run a recessionary gap has a
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relationship with the business cycle
contraction so in short the causes of
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creation of this gap is decrease in the
spending by the government and increase
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in the population that requires more
resources to sustain itself and it
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increases the tax rate also by the
government that affects demand level due
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to the decrease in the supply of the
money in the economy and fluctuation in
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the price again resulting in the
decrease in the consumption of demand
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well what exactly are the effects of the
same see the the effect of the gap
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increase in unemployment level in the
economy as you know the economy is
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creating lesser than the natural GDP
growth level so it also results in lower
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production and lower economic
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growth so there is a contraction of the
what we call as the business cycle due
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to lower level of demands and lesser
supply of money in the overall economy
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what exactly is a solution well on the
solution part to find the solution to
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the recessionary gap the government's
implement the expansion or expansionary
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monetary and fiscal policy so monetary
policy is implemented by reducing the
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interest rate okay in the economy in
order to increase the supply of money to
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enhance growth until the fiscal policy
is implemented by reduction of the taxes
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taxes will go down the fiscal policy
also it decreases taxes but in at the
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center of it is increasing the
government spending in order to boost
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the demand now and what is the
correlation between the recessionary gap
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and the unemployment part what is the
difference or what is the correlation it
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must be noted that you know the effect
of the recessionary gap is increasing in
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employment when the economy is in the
downturn phase then the demand for the
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goods and services decreases as
unemployment is on the rise and in this
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situation the higher the unemployment
level the lower is the overall demand
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which lowers in necessary production and
it further lowers down to realize GDP so
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with a fall in the amount of the
production few employees are needed to
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get to meet the production demands and
leading to addition job losses so in
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this situation like where the company
profits are standstill or they are
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falling a company cannot offer higher
wages and in many industry there are Pay
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cuts in this kind of situation and this
happens due to the change in the
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internal businesses practice or
circumferential cuts which are as a
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result of the effect on the industries
where a portion of the workers wages is
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based on tips like you know restaurants
so finally on the conclusion note on our
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topic to conclude we can see that number
the main cause of the creation of
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recessionary gap is you know high
level and vendors a high price they will
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come due to the inflation that results
in the lower consumption or overall
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demand and the effect of it creates a
cyclic unemployment in the economic this
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increase in the government spending and
implementation the policies to increase
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the supply of money in order to boost
demand is the solution to get rid of
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this problem so that's it for this
particular topic if you have learned and
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