It is computed as the difference between exports and imports. In order to stimulate the economy policy makers employ either fiscal or monetary policies to affect macroeconomic variables. For instance, a decrease in interest rate can boost investment and increase the level of GDP. The current situation of UK is a very common trend in every major economy. After skyrocketing mounts in output levels, growth to start to taper off and enter a showdown. The role of policy makers during this stage cannot be overstated. In order to stimulate the economy, macroeconomic variables are regulated. However, as economics is a social science and policy makers are constrained in analyzing the effects of policies in ceteris paribus, it becomes important that they fully asses the economic repercussions of their implementations.
This paper will look at the economic performance of the United Kingdom by looking at the recent historical value of GDP. The first part will discuss the behavior of GDP from 1990-2005 and determine the trends underlying this behavior. This report will also try to explain the growth or reduction in GDP by looking at the individual components of GDP. Then, it will discuss the fiscal and monetary policy of UK as well as suggest recommendation to further enhance the performance of the economy.
Figure 1 shows the GDP of United Kingdom from ...
GDP in constant prices is used following the rationale that it is a more accurate indicator of the real performance of the country. As opposed to measuring GDP in current prices, it relates a realistic situation as it is tied around a base year. The growth rates of GDP in the aforementioned years are also shown in order to describe the behavior of GDP.
During 2005, UK reports a 1131.21 billion in GDP, rising by 1.9 percent from the 2004 level and 37 percent relative to the 1990 level. On the average, the economy is expanding at a relatively slow pace of 2.48 percent annually. Sustained growth in GDP is evidenced by the upward trend in the value of output produced.
Looking at the growth rates plotted in the other axis, we can see the volatile behavior of GDP with no single trend or pattern. Expansions of output are often followed by troughs which indicate slower growths. In general, we can see positive growth rates with the exception of 1991, when GDP posted a contraction of 1.49 percent. We should also note that since 1993, UK recorded more than 2 percent growth but slowed down in 2005 as it was only able to increase by 1.9 percent. The paper will then conclude with its findings to alleviate the gap in potential and actual output levels.
Source: International Monetary Fund World Economic Outlook Database, 2005
Actual and Potential GDP
Figure 2 shows the output gap in percent of potential GDP for UK from 1990-2005. At the start of 1990, we can see that the GDP of UK is relatively much higher than its potential GDP evidenced by the positive ratio. In fact, the ratio reached 1.5 which means that UK is producing 50 percent more than its potential GDP. However, this positive ratio had taken a different course in the following year