Monday, August 29, 2011

Closing The GDP Gap and Growth Rate Projections

This graph (click to enlarge), from the Bureau of Economic Research, shows the huge effect of future economic growth rates on the time that it will take to close the output gap from the recession. The economy must grow faster than potential GDP to close the gap. If the economy grows by 3.5%, which is 1% above potential GDP, the gap will be closed rather quickly. The gap will not be closed until 2020 if we grow at 3%. On the other hand, the gap will remain if growth is at 2.5%. The growth rate depends upon how quickly the housing market turns around, and it also depends upon what happens in the rest of the world. Shocks in Europe, Japan or in the emerging markets would slow the US growth rate.

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