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China’s Output Gap

EconEye Admin

Analysts say China’s economy is producing less than it could if labor and capital were fully employed. To close this gap in 2026, China’s economy would need to grow by more than 5.3 percent.—economist.com

China’s Real GDP

According to the National Bureau of Statistics of China, the country’s annual real GDP reached approximately 140 trillion yuan in 2025.

Answer the following questions to check your understanding of the story.

1) China’s economy is in which macroeconomic equilibrium?

Wrong! - Above full employment implies overutilization of resources. At full employment, resources are fully employed.

That's Right! - Labor and capital are not fully employed, so the economy is below full employment.

2) What is China’s approximate potential GDP?

Wrong! - 140 trillion yuan is real GDP, not potential GDP. 5.3% is the required growth rate, not potential GDP. Since the economy is below full employment, potential GDP exceeds real GDP.

Well Done! - Increase 140 by 5.3%, giving about 147 trillion yuan.

3) Where does China’s short-run equilibrium occur in the AD–AS model?
At the intersection of the ___________.

Wrong! - Output is neither at nor above potential. LAS shows full employment, but China is below full employment.

Good Job! - Short-run equilibrium occurs where AD intersects SAS at real GDP.

4) Where does the long-run equilibrium occur in the AD–AS model?

At the intersection of the __________.

Wrong! -  In the long run, the economy is at potential GDP. Intersection of SAS and AD curves gives short- run equilibrium.

Correct! - Long-run equilibrium occurs where LAS, SAS, and AD intersect at potential GDP.

5) What is the output gap in China?

Wrong! - The gap is negative, so it cannot be inflationary. 147 trillion yuan is the potential GDP, not the output gap.

Very Good! - Output gap is real GDP minus potential GDP (−7 trillion yuan). A negative gap means a recessionary gap.

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