What does a recessionary gap indicate?

A recessionary gap indicates the difference between potential GDP and actual GDP during a recession because it reflects an economy that is underperforming. When actual GDP falls below potential GDP, it suggests that economic resources, such as labor and capital, are not being utilized to their fullest capacity. This often leads to higher unemployment rates, decreased consumer spending, and lower production levels. In essence, a recessionary gap illustrates the shortfall in economic output — the degree to which an economy's productivity is below its potential level, emphasizing the inefficiencies and slack that can exist during economic downturns. Understanding this concept helps in assessing the severity of economic conditions and can inform policy measures aimed at stimulating growth.