Wednesday, October 14, 2009

Large output gap in UK

As I saw from the chapter UK has a large negative output gap. It means that economy is in recession and spare capacity is taking place. (the fall in GDP, low inflation and rise in unemployment). What can UK do to deal with this problem? Just talk about how the government can  influence on the economy. By monetary policy (interest rate, Bank of England), fiscal policy (government spending and taxes) supply side policy (education, training, etc.).

Lets talk about UK's economy. So really UK's economy depends a lot on US economy and other countries (a lot of export and imports between this countries), because there is not a lot of  goods that are produced in UK, because its cheaper to produce goods not in United Kingdom (because lack of resources and high cost of labour). Economy has always to develop and people (investors: private, government's) have to look for another counties for investments. As we know,  there is a financial crisis in United States and in other countries with developing economy. So the amount of trade relationships fell down.

Some ideas about solving a recession. Investments in other countries (Vietnam, Brazil, Ukraine - developing countries with not high costs of production). It is risky also, but the money have to work. Also it is likely to reduce exchange rate (pound) - devaluation in terms of another currencies -  by increasing the amount of money (by government's orders, for instance). Why do this? To make the prices for national products more competitive to sell more and increase the amount of money, that are going into the country. Also the government should reduce taxes (but not a VAT, because it increases the export of the country). Therefore  government spending would decrease, avoiding a budget deficit (spending more than income).  If it is impossible (to reduce government spending for some time), the government should to bring an emission of money (increasing the amount of money). 

Remember that all this things are interdependence , so to do it successfully the government have to act  very carefully and count all advantages and disadvantages off all actions - changes.     


1 comment:

  1. This is all fine except...no diagram!

    Read:

    http://www.economicshelp.org/blog/

    ReplyDelete