Economic Affairs Essay Sample-THE UK OUTPUT GAP
Implications of the UK Experiencing Stable Output
In economic affairs, it is relevant to determine, identify, and evaluate the difference between what the economy produces and its potential. Basically, there is difference between what the economy produces and what it can produce under the same circumstances. The difference between the two domains is known as the output gap. The International Monetary Fund (IMF) provides insightful information regarding to the issue of economic output and output gap. Jahan & Mahmud (2013), refer to two points of perceptions in their findings, i.e. economic downturns and economic good times. For instance, the economy’s output of goods and services declines during economic downturns. On the other hand, in good economic times, the output (GDP) goes up. The matters of concern in the events of fluctuating outputs illustrate the potential of the economy in terms of output.
The measurement of the performance of the economy determines the output gap. For instance, it would be necessary to make considerate investigations into the issue commonly known as the business cycle. There are concerns by the economists on how close the current economic output is to the presumed long-term output or the potential output of the economy (Jahan & Mahmud 2013). The most appropriate indicator that economists consider in their analysis is the potential of the economy. For instance, the economy might be growing steadily, i.e. the increase of GDP but the most appropriate issues to check is whether the economy is performing according to its potential. The UK has been experiencing both stable and unstable output events. As a result, there have been numerous implications of the output gap to the UK economy.
The output, being the economic measure, has different orientations as related to the measure that relates to the GDP. For instance, the GDP rises or falls while the output is either positive or negative. A positive output occurs when the economy produces more than its expected potential while a negative output gap occurs when the economy performs below the expected potential. A positive output gap occurs when demand for goods and services is high. As a result, industries work above their usual production capacities to meet the high demands. On the other hand, a negative output gap occurs when the demand for goods and services is low. Therefore, there is slack in the economy as a result of the weak dynamics of demand. Generally, an output gap is a measure of the inefficiency of the economy. It suggests that the economy is either underworking or overworking the available resources.
There are numerous implications of stable output in the UK. A stable output is an illustration that the economy is trending towards to a positive output gap. When the output gap is positive and maintained at stable standards, it becomes plausible to analyze the situations and establish the potential impact of such economic trends on the economy. A stable output has more advantages than disadvantages because of its positive impacts on the overall GDP. The following is a figure portraying the range of forecasts of the UK output gap in the UK March 2012.
From the above figure, it is appropriate to state that the UK government’s economy is experiencing a steady growth in terms of production. The industries that are listed in the table clearly indicate a positive improvement in the economic output of the country. However, there exist the real influences of the output gap on the current economic performance and the future status of the economy. The key implications of a stable output to the economy of the UK entail taxation, bank loan rates, consumer’s purchasing power, employment status, and the GDP.
First, taxation is the most essential concept in economic terms, where the government has to survive with the borrowing and spending funds on relevant projects. Taxation rates are dependent on the nature of the economy in terms of the capacity to withstand economic fluctuations. Taxation is the mode of collecting money from the consumers through direct VATs of other forms of duties. Inflation impacts negatively on the output gap of the economy. Therefore, taxation is expected to go higher during inflation times. Additionally, taxation decreases when the economy stabilizes. Therefore, the key issue of consideration is the implication of a stable output to the economy of the UK. A stable output leads to increased GDP in the economy. The economical terms of the stable output indicate that the UK government is comfortable with the resources within the economy. Instantly, taxation is likely to go down as a result of the stability of the economy. In such cases, there are few instances of inflation. Consumers will pay less for services and goods since the production cost is low. Therefore, the economic situation encourages the formation of an economy that favors the concept of positive output gap. Afterwards, the implications of a steady output on the economy would be experienced from the perspective of reduced taxation; hence, leading to lowering of commodity and service prices.
Financial institutions are relatively affected by the nature of the economy. These institutions rely on the progression of the government in terms of the output gap. In the state of a stable output, financial institutions will operate in a comfortable economic environment. Since the environment has direct implications on the performance of banking institutions, it is evident that stable output will lower the interests that banks charge on their loans. The driving factor is the status of the economy, which is associated with increased circulation of money. People also tend to have more money because of the stable commodity prices, increased employment chances, and low costs of production. Relatively, the demand for bank loans will be lower. In such economies, very few people tend to borrow loans from banking institutions. Consequently, it is likely that the interest rates that banks charge their customers will fall tremendously. As far as the borrowers will benefit because of the decreased bank interests, the banking institutions are likely to be affected to some extent. There will be implications on the operation of the banking institutions due to pressure to maintain stability in their performance.
Economic stability also determines the consumer’s power. In an economic system that lacks inflation, there exists constant circulation of large amounts of money. Employment rates also rise due to the increased processing companies and industries. The government also opens new avenues of job creation. In this case, people get access to large amounts of money that they spend without considering any issue of economic turndown. The government benefits from such situations because of the increased monetary circulation in the market. The economy becomes stable and the government maintains high levels of development because of the availability of money and resources. With the high circulation of money in the market, consumers are likely to spend more on goods and services. In return, commodity and service providers set up new or expand their businesses to satisfy the high demand for goods and services. When more industries and markets open up as a result of increased consumer power, the economy also grows substantially. In this case, the UK government is entitled to the extra wages for development purposes. The government can redirect some of the funds to development projects such as infrastructure, health sector, and education sector. Citizens also benefit from the projects.
Employment is one of the measures of the economic performance of a certain region. In developed nations, the rate of employment is higher than the employment rate in less developed or the developing nations. A positive output that arises from high demand for goods and services increases the number of production industries. It also opens up employment opportunities in various government sectors. Therefore, a stable output will enhance employment opportunities in the UK. Many people will be employed in the created production facilities and other government departments. The government tends to benefit more from increased employment rates. This is because many people lead to an increased production in the various economic sectors. Afterwards, the people will spend the money and thus influencing monetary circulation in the economy. This is another measure of the economy that arises from the effects of a stable output. With a stable output in place, it is evident that the economic output gap will also go higher. The basic elements of this scenario include higher consumer power and economic growth in most government sectors.
The other implication of the UK stable output is a higher GDP. The GDP created a formal balance between what the government spends on salaries and development of infrastructure. It also takes into consideration the government’s means of soliciting money from the private and public sectors that play key business roles. A stable output will definitely enhance the strength of the GDP; hence, giving the government room to forecast its development projects. It is important for the government to consider all means of strengthening the GDP. However, the most important factors that can be considered in this line include the unemployment issues, industrialization, and the consumer power. A definite illustration of the benefits of a stable output is that it is effective in promoting economic growth of the country. The representational and manifestation of such factors is usually in the public domain. The UK will benefit from the placement of its economy at the status of higher GDP. It would prove to the whole world that there are not inflation issues within its boundaries. Therefore, it is expected that there will be investor influx into the UK with the intention of investing in the economy.
Economic performance of a country depends on factors such as the output gap and inflation rates. Output gap determines the level of performance that the economy can rich while considering the available resources. In accordance to the output gap, the UK’s stable output has a lot of positive impacts on its economy. For instance, it has augmented employment opportunities, GDP, consumer power, and lowered bank interests.
Jahan, S. & Mahmud, A. S. (2013). What is the Output Gap? Retrieved April 2, 2014 from
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