The Neutral Level of NGDP and the NGDP Gap : Q3 2020

This policy brief reports on the NGDP gap, a measure of unexpected changes in the dollar size of the US economy, is the percent difference between the actual and the neutral level of NGDP. The neutral level of NGDP, in turn, is a sum of all dollar incomes expected by households and businesses coming into a specific time period.In the third quarter of 2020, the NGDP gap was −4.77 percent, a significant narrowing from the −11.62 percent NGDP gap experienced in the second quarter of 2020. Despite this progress, an NGDP gap of −4.77 percent indicates that the dollar size of the economy is still significantly smaller than pre-pandemic expectations.In other words, the NGDP Gap has shrunk and is at its pre-pandemic levels. The economy has made a lot of progress toward recovery, but the total dollar size of the economy is still significantly smaller than pre-pandemic expectations