A deflationary gap occurs when the actual real GDP is below its potential output. In this situation, some economic resources are underutilized, which in turn, creating a downward pressure on price level. This term is synonymous with the recessionary gap or the Okun gap.

What is deflationary gap in economy?

A deflationary gap means that the economy is below full capacity and there is low growth. It doesn't necessarily mean deflation because even in a recession with falling output, we may still get a very low rate of inflation.

How is deflationary gap determined?

For example, deflationary gap is the amount by which aggregate demand must be increased to push the equilibrium level of income through the multiplier to the full employment level. In other words, if current national income is below full employment national income, a deflationary gap will arise.