Output gap.

In plain English

The output gap compares actual gross domestic product to potential gross domestic product, the sustainable level of output given the workforce, capital stock, and productivity. A negative gap means the economy is running below capacity, with idle workers and unused plants, and it usually comes with disinflation. A positive gap means the economy is running hot, which tends to push prices and wages up. Potential output cannot be observed directly, so it is estimated, and those estimates get revised. That uncertainty is a real limit on using the gap to guide policy in real time.

01Why it matters

The size and sign of this gap is a big part of why a central bank raises or cuts rates, so it feeds through to mortgage rates, hiring, and wage growth.

02The math, step by step

Say actual output is $970 billion and potential output is $1,000 billion. The gap is 970 minus 1,000, or negative $30 billion. Divide by 1,000 and multiply by 100 to get a negative 3 percent output gap.

Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.

03What this is NOT

04Receipts

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