Output gap or GDP gap refers to the difference between actual output/GDP and the potential output/GDP. According to economists, potential output refers to the highest level of Gross Domestic Products (in real terms) that an economy can sustain over a long period. For actual output, the GDP / output occur below or above the potential GDP. In calculations, it is represented as Y-Y*; Y is the actual GDP whilst Y* is the potential GDP. Therefore, the percentage GDP gap can be given as (GDP actual – GDP potential) X100
GDP potential
Extend at Which GDP Gap Caused a Concern
The United Kingdom Scenario
/>
Oxford economists have established that the UK’s output gap has reached about -4.5%, causing concerns for interventions. In this regard, it denotes the percentage at which the country’s economy has experienced reduction in the years 2013-14. According to the Central Bank of England analysts, the case is expected to remain the same for the next 5-6 years. This will mean that the country’s economy will continue to operate below its capacity as some capital and workers remain idle. The governor of the Central Bank has said that the country could experience a lot of spending in employment benefits and foregone taxes. In this regard, the governor reiterates that the problem does not lie with the number of people to be employment but with the quality of labor that UK industries need.
.
The Case of US
In the US, It has been noted that since its effective demand is weak, the economy will be lagged from reaching its potential output. As business struggle to earn more profits, they are shying away from employing more people due to costs of minimum wage restrictions. It has been estimated that due to less effective demand and unemployment, the actual US output will be restricted at $16.0 trillion-$16.1 trillion, which is less than the potential real GDP of $16.7 trillion; the 0.7 trillion is a bigger portion to cause concern. According to the guidance of the Federal Reserve, due to less effective demand for products and hence labor, firms should expect their profitability going down.
What the GDP Gap is Likely to Cause in the Two Countries
As already discussed, as the two countries continued to bite the effects of large GDP gaps between 2013 and 2014, it is evident that the longer they continue to exist, the more they will cause labor markets to underperform. From the 2013 October employment statistics, the United States’ unemployment rate stood at 7.3% while that of UK was at 7.7%. Some parts of their populations and capitals will therefore stay idle without producing to capacity. Moreover, the situation of hysteresis will result, whereby some workers will have their skills deteriorating (due to staying out of the job for a long term), rendering them unemployable in future. It has also been noted that, in US, the share of those who have been out of employment for six months has increased to 36.9%, which may represent skills that could have deteriorated. Nonetheless, one should expect the rise of/ continued deleterious effects on public finances to finance the unemployed, as the government foregoes taxes on them. The two nations therefore will be forced to continue with food stamps, insurance, temporary family assistances and Medicaid. Reduced tax base and increased public spending will increase the government’s budget deficits.
Policy Interventions
The countries have been stimulating their job markets to spur economic growth, noting that for instance in America, 1.9 million jobs could boost the national output by 1.3%. The biggest problem in unemployment has been graduates having careers that do not match those in the job market, and therefore structural intervention is needed. Moreover, some analysts have noted that capping government spending could help in reducing the output gap.
