This is a gap that arises when an economy maneuvers at a level below the probable full employment stability level. It implies, therefore that the Gross Domestic Product achieved is lower than the one that will be achieved at full-employment level. The recessionary gap, therefore, causes the prices of commodities to drop in order to achieve balance. There is also a possibility that recession causes inflation which reduces revenue from exports.
Full-employment equilibrium, on the other hand, is the degree to which the economy performs if unfettered by other external forces. If the economy is operating above the full-employment equilibrium level, then the gap that results is the inflammatory gap. The major consequence of recessionary gap is unemployment, an illness to the society.
Expansionary gap
This gap refers to the variance amid the actual Gross Domestic Product (GDP) and the probable GDP in the economy. It is determined by the results because the difference between potential and real GDP’s lies in the point that the ideal GDP has been accustomed to recompense for seditious factors while the likely GDP represents the real GDP in moments when there is full-employment in a given economy.
Expansionary gap maybe caused by central banks of a region. It occurs when the bank lowers the lending rates and interest rates as a measure of increasing demand of the product by consumers whereby its main aim is to motivate a lackluster economy. This means that the consumers will have access to the funds and credit services which will enable their purchases and other expenses.
If the prices are broadly fixed, wages flexible upward, and wages down sticky, an expansionary gap will tend to raise inflation while a recessionary gap will reduce inflation. During an expansionary gap, where firms are producing tremendously, they will respond by endeavoring to raise their prices. On the other hand, during the recessionary gap, firms are producing below standard capacity. Firms, therefore, will try to shrink their relative prices, reducing the inflation.
A stick wage is a scenario whereby employees do not want their wages cut or reduced. It is normally characterized by a demand of goods falling and, therefore, forces the firms to cut their charges. With the cutting of the prices, however, the wages of the employees remain fixed. As the workers become expensive and the cost of production also high, the firm hence decides to produce fewer products. The gap that occurs here is the recessionary gap.
At full-employment, the government might decide to regulate taxes, expenditure and consumption to reduce the recessionary gap. As we had noted earlier, recessionary gap occurs when the economy is operating below the full-employment level, therefore, the budget is compromised. The economy here is operating on a deficit and, therefore, the Government must put in measures to try and curb the deficit. On the other hand, during an inflammatory period, the government is operating above the full employment level, hence incurring surplus in its operation.
However, recession only occurs when wages are flexible upwards and sticky downwards. This means that employees agree to an increase in their salaries but disagree to any wage cut. This mostly happens to the managers and those high in the rank. On another hand, if the wages are sticky in both directions, that is, they do not rise nor lower, and then the government will have no hustle trying to control the budget and the economy of the country.
Reference
Powers, S. (2011). The Downward Rigidity of Wages. Journal of Recessionary and
Expansionary gaps, 12, 123-125.
Mehta, J. (2013, January 12). Government Budgetary policy. The Daily Nation Post, pp. A1,A3.
