The Real potential GDP is the CBO’s estimate of the output the economy would produce with a high use rate of its capital and labor resources. The data is adjusted to remove the effects of inflation.
The equation for Output Gap is:
Output Gap = 100*(Real GDP – Real Potential GDP) / Real Potential GDP
The positive value of the output gap indicates that the economy is expanding and is running to its limit. Usually, in periods of over-utilization, the economy overheats, and inflation picks up.
