Closing the Output Gap in the United Kingdom Essay

Closing the Output Gap in the United Kingdom - Essay Example Of course, actual output is the recorded GDP of a given time that can be in nominal or real values. The nominal value refers to the prefers of the GDP synchronic to the prices or price reference of a given year while the real GDP can be valued in terms of a base or a reference prices of a reference year. Dornbush et al. (2008, p. 15) explained that the concept of an output gap provides a way of measuring the magnitude of the cyclical deviations of actual output from the potential output. The concept â€Å"potential output† is also interchangeable with the term â€Å"trend output† (Dornbusch et al. 2008, p. 15). From the economic perspective of Dornbusch et al., the output gap is negative during a recession and positive during an expansion (2008, p. 15). In a recession, resources are unemployed and actual output is below potential output. In contrast, during a positive gap or expansion, workers overtime and machineries are utilized more than the usual (Dornbusch 2008, p. 15). Positive gap or expansion is also known as an economic recovery (Dornbusch 2008, p. 15). For Mankiw (2006, p. 425), potential output or full employment output is more accurately the natural rate of output because â€Å"it shows what the economy produces when the unemployment is at its natural or normal rate†. At the same time, Mankiw pointed out that â€Å"the natural rate of output is the level of production toward which the economy gravitates in the long run† (2004, p. 425). According to classical viewpoint, the potential output or the natural rate of output depends on labour, capital, natural resources, and technological knowledge and, therefore, shifts in the potential output or natural rate of output depend on changes in the said variables (Mankiw 2004, p. 425). An output gap can promote price volatility.