Potential real GDP is the real output that an economy can produce when it is operating at a level that can be sustained without excessive inflation. Output falls below its potential level during a slump and can temporarily rise above its potential level during a boom.
The output gap is equal to the economy's actual real GDP minus its potential GDP. The gap is negative when the economy is in a slump and positive when it is in a boom. The following chart shows the output gap for the US economy from 2000 to 2016 as a percentage of potential GDP. The chart is based on actual real GDP as reported by the Bureau of Economic Analysis and potential real GDP as estimated by the Congressional Budget Office. (Data for Q4 2016 are the author's own preliminary estimates.)
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