Overheating (economics)
Encyclopedia
Overheating of an economy
occurs when its productive capacity
is unable to keep pace with growing aggregate demand
. It is generally characterised by an above-trend rate of economic growth
, where growth is occurring at an unsustainable rate. Boom periods are often characterised by overheating in the economy.An economy is said to be overheated when inflation increases due to prolonged good growth rate and the producers produce in excess thereby creating excess production capacity.The main reason behind overheating is insufficient supply allocation because of excess spending by the people due to increase in consumer wealth.
for goods must be met via the over-employment of resources. This may be achieved by employing workers for extra shifts or using machinery beyond their recommended working hours. This type of production is considered unsustainable because the over-employment cannot be supported indefinitely.
occurs as suppliers try to capitalize on the excess demand which cannot be met via existing production constraints. These higher prices tend to reduce aggregate demand and exports (since goods and services become more expensive abroad) leading to reduced consumption. Central bank
s often simultaneously tighten monetary policy
in response to increased inflationary pressures, reducing investment expenditure, which in tandem with decreased consumption, can lead to economic recession
.
Economy
An economy consists of the economic system of a country or other area; the labor, capital and land resources; and the manufacturing, trade, distribution, and consumption of goods and services of that area...
occurs when its productive capacity
Aggregate supply
In economics, aggregate supply is the total supply of goods and services that firms in a national economy plan on selling during a specific time period...
is unable to keep pace with growing aggregate demand
Aggregate demand
In macroeconomics, aggregate demand is the total demand for final goods and services in the economy at a given time and price level. It is the amount of goods and services in the economy that will be purchased at all possible price levels. This is the demand for the gross domestic product of a...
. It is generally characterised by an above-trend rate of economic growth
Economic growth
In economics, economic growth is defined as the increasing capacity of the economy to satisfy the wants of goods and services of the members of society. Economic growth is enabled by increases in productivity, which lowers the inputs for a given amount of output. Lowered costs increase demand...
, where growth is occurring at an unsustainable rate. Boom periods are often characterised by overheating in the economy.An economy is said to be overheated when inflation increases due to prolonged good growth rate and the producers produce in excess thereby creating excess production capacity.The main reason behind overheating is insufficient supply allocation because of excess spending by the people due to increase in consumer wealth.
Causes
High levels of aggregate demand tend to be the cause of overheating. If short run aggregate demand exceeds long run aggregate supply, then the excess demandDemand
- Economics :*Demand , the desire to own something and the ability to pay for it*Demand curve, a graphic representation of a demand schedule*Demand deposit, the money in checking accounts...
for goods must be met via the over-employment of resources. This may be achieved by employing workers for extra shifts or using machinery beyond their recommended working hours. This type of production is considered unsustainable because the over-employment cannot be supported indefinitely.
Effects
Overheating is generally preceded by lower than average economic growth. Demand pull inflationDemand pull inflation
Demand-pull inflation is asserted to arise when aggregate demand in an economy outpaces aggregate supply. It involves inflation rising as real gross domestic product rises and unemployment falls, as the economy moves along the Phillips curve. This is commonly described as "too much money chasing...
occurs as suppliers try to capitalize on the excess demand which cannot be met via existing production constraints. These higher prices tend to reduce aggregate demand and exports (since goods and services become more expensive abroad) leading to reduced consumption. Central bank
Central bank
A central bank, reserve bank, or monetary authority is a public institution that usually issues the currency, regulates the money supply, and controls the interest rates in a country. Central banks often also oversee the commercial banking system of their respective countries...
s often simultaneously tighten monetary policy
Monetary policy
Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability. The official goals usually include relatively stable prices and low unemployment...
in response to increased inflationary pressures, reducing investment expenditure, which in tandem with decreased consumption, can lead to economic recession
Recession
In economics, a recession is a business cycle contraction, a general slowdown in economic activity. During recessions, many macroeconomic indicators vary in a similar way...
.
Recently
- Economists have suspected ChinaChinaChinese civilization may refer to:* China for more general discussion of the country.* Chinese culture* Greater China, the transnational community of ethnic Chinese.* History of China* Sinosphere, the area historically affected by Chinese culture...
of suffering from the effects of overheating in its rapid GDP growth in recent years .
Historically
- The Lawson BoomLawson Boom"Lawson Boom" is a term used to describe the macroeconomic conditions prevailing in the United Kingdom at the end of the 1980s, which were indelibly associated with the policies of Chancellor of the Exchequer Nigel Lawson....
of the late 1980s/early 90s in the UKUnited KingdomThe United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages... - SwitzerlandSwitzerlandSwitzerland name of one of the Swiss cantons. ; ; ; or ), in its full name the Swiss Confederation , is a federal republic consisting of 26 cantons, with Bern as the seat of the federal authorities. The country is situated in Western Europe,Or Central Europe depending on the definition....
during the periods of 1962-1967, 1971-1974, 1988-1991