Economic Growth Of The Uk Economy

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Economic Growth
Economic Growth is a measure of the percentage increase in either real gross domestic product (GDP) or potential GDP of an economy. GDP measures the output of goods and services produced by an economy by factors of production located within that economy.

The figure above shows the trend of UK’s economic growth from 2008 to mid-2014. As illustrated in the figure the credit crunch of 2007-08 hit the UK economy hard and caused a steeper drop in real GDP than even the great depression of the 1930s. However, due to loosening of monetary and fiscal policy, the UK experienced a partial recovery in 2010 and 2011 before heading back into a recession as seen in Q1 2012. By the end of Q1 2013, the economy started picking up
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The aim of quantitative easing is to increase private sector spending in the economy thereby increasing real GDP.

As the figures above illustrate, there is a significant GDP gap. HM treasury forecasts a GDP gap of -2.7% for 2012/2013. This, however, may underestimate the amount of spare capacity in the UK economy. If the output gap were closer to -10% it would make a much stronger case for more accommodative monetary and fiscal policy use.

Inflation is a sustained increase in the general price level, leading to a fall in the purchasing power of money. It is measured in two different ways, through the Retail Price Index (RPI) and the Consumer Price Index (CPI). The difference between the two is that the RPI takes into account different things compared to the CPI, such as housing costs.

Currently, inflation was at 0.3% in January, measured by the CPI, with the target level being 2%. This fell from 0.5% in December due to ‘Cheaper fuel and lower energy prices’ . Illustrating this on a demand and supply diagram, there would clearly be a rightward shift in the Short Run Aggregate Supply (SRAS) curve, as costs of productions for firms have reduced.

One monetary policy enforced in the economy are low interest rates, set by the Central Bank. The reason they are low is to influence aggregate demand in the economy. Low interest rates mean that the cost of borrowing
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