UK Output gap 2014 and UK Banking Oligopoly Free essay! Download now
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UK Output gap 2014 and UK Banking Oligopoly
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| Words: 4423 | Submitted: 04-May-2014
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DescriptionIt's about the Evaluation of UK's Output gap and decribes the concept of Oligopoly as well as giving the case of UK Banking system
Question 1: Explanation of the article in Money Week (1st March 2014), instruments to avoid an inflationary pressure.
The article in Money Week concerns with whether there is a risk of deflation or inflation. It emphasizes the danger of an overestimated output gap that could lead to stubborn inflation due to loose monetary policy following the 2008 recession. This report has the following objectives: Firstly, it explains the concept of the output gap and its coherency to inflation. Secondly, it shows the measurement of output gap and finally, it highlights inflation and means of monetary policies to avoid inflationary pressure. All theoretical explanations are underpinned by data of the UK economy’s current situation. The report will be concluded by evaluating the data.
The output gap
The term output gap (GDP gap) describes the difference between the potential an economy can sustainably produce (potential output) and the actual economic output (Economist July 30th 2009; Gordon: p. 30). The concept was developed to answer questions like how long and how fast an economy can grow till it runs into inflationary problems (Sloman: p. 566). A positive output gap means actual GDP (gross domestic product) is above the production capacity (ibd.: p. 658). This situation can only occur in the short run due to very high demand when workers do extra hours and factories operate above their capacity and will result in a demand-pull inflation (ibd.: 656). In the opposite case a negative output gap occurs when weak demand leaves a spare capacity in the economy. The GDP gap follows the natural ups and downs of an economy (business cycle). During a boom with rising inflation the gap will be positive and during a recession it is negative. Both gaps are unwelcome because they represent inefficient situations with overworking the economies resources or underworking them (Jahan). For this reason the aim of the governments and central banks is to match actual and potential GDP. As it was shown above inflation due to a positive GDP gap is based on demand-pull. Output gap and inflation have a positive correlation. Additionally there exist other types of inflation not related to a positive gap like cost-push or expectations-generated inflation which makes it possible that a negative output gap and inflation can occur simultaneously (Sloman: pp. 657).
Measuring the output gap
However the underlying problem is the measurement of the GDP gap as it is not observable and needs underlying models which use different assumptions about how the economy works (Borio et al.: p. 1, Goodwin et al.: p. 72). ...
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