Over 2012/13, to what extent was the output gap a cause for concern?

Over 2012/13, to what extent was the output gap a cause for concern?

1. Output Gap

   • The difference between actual and potential output. When actual output exceeds potential output, the gap is positive. When actual output is less than potential output, the gap is negative

2. PPF

   • Assumes that all resources are used efficiently
   • Technology determines the position of the potential output line, results in movements on the ppf
   • We can't be on the line in reality: due to lack of knowledge and inefficiencies

3. Business Cycle

   • Actual growth tends to fluctuate, and could be a result of the business cycle
   • 4 Stages: Upturn, Expansion, Peak, Recession

4. Since the recession of 2008, the UK has lost a significant amount of potential output due to the prolonged nature of the recession

   • This leaves a negative output gap, however it is difficult to assess the amount

5. Factors that influence an output gap

   • Unemplyment, Fall in Real Wages, Spare Capacity, Inflation, Labour Productivity
     • Unemployment is seen as an indicator to show lost potential output. In 2012, the rate was 7.9% which was lower than expected. If people are not working it is difficult to grow in an economy and therefore to reduce the output gap
       • Increase in PT jobs as opposed to FT (Labour Productivity). Unemployment is still high, but it is gradually decreasing. Recession has made it difficult for firms to be able to supply jobs
     • Spare Capacity: measures the extent to which an industry or an economy is operating below the maximum sustainable level of production. Expect inflation to decrease, but in the UK it hasn't decreased much
     • As unemployment rises, its harder for workers to bargain for higher wages, unemployment should reduce wage inflation

6. Liquidity Trap

   • Keynesian Economics: when injections of cash into the private banking system by a central bank fail to lower interest rates and hence fail to stimulate economic growth
   • Caused when people hoard cash because they expect an adverse event such as deflation and insufficient aggregate demand