ID Number
Output gap is defined as the difference in the country’s actual gross domestic product and the country’s potential gross domestic product. During recession periods, the output of products and services also declines. On the other hand, when the economy of the country is in good condition, gross domestic product also increases. In an output gap, the potential output pertains to the maximum amount of services and products an economy can have when it is efficient of in its full capacity. Output gap can either be positive or negative. A positive output gap happens when actual output is greater than the full capacity output. Such happens when there is exceedingly high demand. On the other hand, negative output gap happens when the actual output of services and products is less than the potential output. In gauging inflation, policymakers often make use of potential output as reference and usually define it as the output level consistent with no pressure in the rise and fall of prices. Output gap therefore measures the inflation pressure and is a significant connection between the actual aspect of the economic and inflation.
In India in 2013, inflation in retail and wholesale has improved meaningfully because of the currency stability which was achieved in September and the continuous negative output gap. In China, the demand for corn in the future is predicted to increase and will be supplied by importation of products from the United States. This, in turn, will narrow the output gap. It is also predicted that in 2023 and 2024, the demand for corn will increase by 41%. China, will therefore, increase its production in order to supply the demands of the consumers.
In 2014, output gap of Japan has shown improvement with only -0.3%. It can be recalled that in 2008, the country’s actual gross domestic product has been below the potential output and this difference has narrowed as domestic demand continues to improve and drive growth. In addition, the output gap also decreased due to insistent quantitative easing of the Bank of Japan. From October to December of 2014, the output gap was -1.6%. The difference in output gap from late part of 2013 and early part of 2014 is primarily influenced by the factors that are made as point of reference in the measurement. The 2008 financial crisis brought about by the collapse of the Lehman Brothers caused Japanese companies with considerable surplus capacity. At present, consumer spending has picked up and the companies feel that they have sufficient manufacturing capacity to comply with consumers’ demands.
In the United Kingdom, based on the data of Oxford Economics, the output gap of the country is 4.5%. According to the inflation report of the country, its MPC is 1 to 1.5% of the gross domestic product and remains to be concentrated in the work sector. UK finds this positive because it merely posits that the Bank of England retains the position that the economy of the United Kingdom has encountered a decrease in its growth potential for the long term. Because of the slow productivity growth in the country, the government revised its position concerning the strength of the productivity response to greater demand. The extent and timing of recovery in the aspect of productivity remains uncertain and such uncertainty is carried over in the policy’s outlook. On the other hand, if the country’s productivity becomes quicker than what it was expected to be, there is a tendency for bank rate to increase at a gradual range.
References
Clark, E. (2014). China Corn Demand Set to Rise 41% By 2023. [online] AgWeb - The Home Page of Agriculture. Available at: http://www.agweb.com/article/power_hour_china_corn_demand_set_to_rise_41_by_2023_NAA_Ed_Clark/ [Accessed 28 May. 2014].
Pickering, K. (2014). UK Economy Understanding the Output Gap and its impact. [online] Constructionproducts.org.uk. Available at: http://www.constructionproducts.org.uk/blog/v/view/uk-economyunderstanding-the-output-gap-and-its-impact/ [Accessed 28 May. 2014].
The Economic Times, (2013). Savings bank interest rates should be raised to 6%: Rana Kapoor, MD & CEO, YES Bank - The Economic Times. [online] Available at: http://economictimes.indiatimes.com/opinion/interviews/savings-bank-interest-rates-should-be-raised-to-6-rana-kapoor-md-ceo-yes-bank/articleshow/34244103.cms [Accessed 27 May. 2014].
White, S. (2014). Japan first quarter output gap narrows to minus 0.3 percent as domestic demand improves| Reuters. [online] Uk.reuters.com. Available at: http://uk.reuters.com/article/2014/05/23/uk-japan-economy-output-gap-idUKKBN0E307I20140523 [Accessed 27 May. 2014].
