Economic convergence between UK and EUROLAND is extremely unlikely to be achieved before the next election.
In terms of measuring convergence between two respective economies, most economists would concentrate primarily on two key indicators, both of which are capable of arithmetic measurement:.
1.1 Respective inflation rates of the two economies concerned; and.
1.2 Respective output gaps of the two economies concerned. The output gap.
represents the difference between the actual output of the economy on the one.
hand and the economy's potential output on the other. Where the actual output.
is less than the potential output, the economy is said to have a "negative output.
gap" and, in colloquial terms, might be described as "in recession". By.
contrast, where the economy concerned is producing more than its estimated.
capacity, it is said to have a "positive output gap" and in colloquial terms,.
might be described as overheating.
Background.
2. The reasons why the above indicators are so significant are as follows:.
2.1 Inflation represents the rate at which prices are increasing and is obviously an.
important economic indicator in its own right, whilst the output gap gives a.
snapshot as to where the economy is in terms of the economic cycle;.
2.2 The inflation rate and the output gap of an economy are both key variables in.
terms of determining the correct interest rate for the economy concerned.
So on these measures, how are the UK and Euroland converging?.
Recent Record.
3. Using the Euroland HICP measure of inflation, the UK has an inflation rate of.
1.2% compared to Euroland's 1.9%. As regards the respective output gaps, then.
using official figures we calculate that the UK has a negative output gap of 1.4%.
(in other words, the actual output is 1.4% less than capacity output), whilst.
Euroland has a negative output gap of 4.0%. As regards the average divergence.
X:/MF/030625/BN00021.
between the UK and Euroland over the last two years on inflation and the output.
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