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"The economic cost of unemployment is measured by the GDP gap.” Explain this statement. When on...

"The economic cost of unemployment is measured by the GDP gap.” Explain this statement. When on the business cycle are you most likely to experience a GDP gap? During this time what can one say about the inflation of the economy?

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Answer #1

The GDP gap in the economy can be explained as the difference between the actual output and potential output. Higher the gap lower the employment i.e. high unemployment because of the potential output the unemployment level is only at natural.

In a business cycle, GDP gap will be experienced when the economy is going through the recession. At this point, the inflation will be very low or there can be a deflation in the economy. The demand will be less and that will decrease the price and employment level in the economy.

the below graph shows the GDP gap.

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