Output Gap Oligopoly

University of Westminster |
End of module assignment (Semester 2 2013-14)
Westminster Business School |

Course: MA Business ManagementModule: Analysis of the Business EnvironmentPresented by: Rossano Cazzocuore (14568211)Submission Deadline: 28th April 2014Words part A: 2112Words part B: 1711 |

Question 1: Explanation of the article in Money Week (1st March 2014), instruments to avoid an inflationary pressure.

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...