UK Output gap and UK banking Oligopoly
Question 1: Explanation of the article in Money Week (1st March 2014), instruments to avoid an inflationary pressure.
Introduction
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
Introduction
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
References: Bank of England (2010). Quarterly Bulletin 2010 Q4. Evolution of the UK banking system. Available: http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/qb100407.pdf. Last accessed: April 26th 2014. BBC (April 2nd 2011). Retail banks not competitive, says Treasury committee. Available: http://www.bbc.co.uk/news/business-12935228. Last accessed: April 27th 2014. Economist (Sep 14th 2013). British banks: Cracking the oligopoly. Available: http://www.economist.com/news/britain/21586332-new-competitor-offers-hope-shake-up-british-banking-cracking-oligopoly. Last accessed: April 27th 2014. Gallu, J. et al. (July 3rd 2012). The Libor Scandal Claims Its First CEO. In: BloombergBusinessweek. Markets & Finance. Available: http://www.businessweek.com/articles/2012-07-03/the-libor-scandal-claims-its-first-ceo. Last accessed: April 27th 2014. House of Commons (March 24th 2011).Treasury – Ninth Report. Competition and choice in retail banking. Available: http://www.publications.parliament.uk/pa/cm201011/cmselect/cmtreasy/612/61204.htm. Last accessed: April 26th 2014. Miller, R. (1982). The Herfindahl-Hirschman Index as a market structure variable: an exposition for antitrust practitioners. In: The Antitrust Bulletin/Fall 1982. Available: http://heinonline.org/HOL/LandingPage?handle=hein.journals/antibull27&div=22&id=&page=. Last accessed: April 27th 2014. Office of Fair Trading (January 2013). Review of the personal current account market. OFT1005rev. Available: http://www.oft.gov.uk/shared_oft/reports/financial_products/OFT1005rev. Last accessed: April 26th 2014. Sloman, J., Hinde, K., Garratt, D. (2010). Economics for Business. 5th Edition. Harlow: Pearson Education. Telegraph, The (April 2th 2011). What the Treasury Select Committee report on retail banking says – key quotes. Available: http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/8421900/What-the-Treasury-Select-Committee-report-on-retail-banking-says-key-quotes.html. Last accessed: April 27th 2014. Telegraph, The (January 18th 2011). Big banks running an oligopoly, says Virgin Moneychief. Available: http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/8266582/Big-banks-running-an-oligopoly-says-Virgin-Money-chief.html). Last accessed: April 27th 2014.