I had the same queasy feeling Simon and have begun to look into the
underlying assumptions of the thing.
Strikes me that the problem is the baseline. As I understand it, the
baseline is that a point is chosen as the starting point and from that
starting point a trendline constant is chosen, much like a
budgeted/standard cost in management accounting. That constant is a
linear constant and may prove to be too high, too low or spot on. Hence,
the output gap can be negative, positive or zero.
I only had time to skim this so far before I had to come to work but I
have seen talk of non linear trends suggested. To my mind, a linear
trend line assumption for an economy like the UK can't be that smart,
can it, except under very stable conditions? At the moment the UK is
pretty stable; but in the 1970s and 1980s?
I saw a table that shows the classic deviation from trend, too, whereby
the further away from the baseline, the greater the average deviation is
likely to be. This situation is much like the bankruptcy prediction
models that have abounded since the mid 1960s.
And so on.
Duncan Williamson
-----Original Message-----
From: Simon Foley [mailto:[log in to unmask]]
Sent: Friday, 02 m11 2001 1:15
To: [log in to unmask]
Subject: Re: Output Gap
Dear all
Geoff is completely correct with his definition of the output gap but it
does not really explain one of the mysteries of the fact that actual
output can be greater than capacity as illustrated by a positive output
gap in times of boom. I have heard the arguments to explain this such
as overtime working , imports etc, but none of can effectively explain
such a phenomenon. Additionally, I have also wondered how one
calculates the capacity of an economy and the its expansion - unused
office space, land, capital, unemployment, inventories? Any ideas or
comments?
Simon Foley
====================================
Simon Foley
Head of Economics and Exams Officer - Bangkok Patana School
E-mail: <mailto:[log in to unmask]> [log in to unmask]
Phone 66 2 398 0200
Fax 66 2 399 3179
====================================
----- Original Message -----
From: "Alison Eves" < <mailto:[log in to unmask]>
[log in to unmask]>
To: < <mailto:[log in to unmask]>
[log in to unmask]>
Sent: Wednesday, October 31, 2001 2:37 PM
Subject: Output Gap
> I realise that this is probably a very simplistic question, but I have
> got myself confused, and would appreciate some help.
> I have found conflicting definitions of when an output gap is
positive,
> and when it is negative. Anderton (3rd Edition) page 167 says that the
> output gap is positive when GDP is above the productive potential.
Biz-
> Ed glossary says that a positive output gap means we are producing
less
> than we potentially could. Most definitions just talk about "the
> difference" between GDP and the productive potential, which avoids the
> issue. Is there an accepted convention?
> Thanks in anticipation
> Alison
> --
> Alison Eves
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