Symptoms of an Overheating Economy
The IMF recently asked the Philippines to take measures to rein in its overheating economy. This is not the first time the IMF has made such a statement. In fact, IMF commonly asks countries to take measures to prevent overheating. However, the problem is that there is no standard definition which defines the phenomenon of an overheating economy. This is the reason why different nations interpret the IMFs warnings in a different manner and take different steps.
In this article, we will make an attempt to define the phenomenon of overheating formally. We will also list down some of the symptoms which are commonly associated with the overheating of any economy.
What is Economic Overheating?
The term overheating has been borrowed from automobile engineering. In the automobile field, when an engine overheats, it ends up using too much energy to generate excessive heat at any given point of time. This increase in heat causes long-term damage to the engine.
Similarly economic overheating refers to the presence of excessive economic activity at one given point of time. This excessive economic activity happens because of overly optimistic expectations by investors and businessmen. However, the economy is not capable of consuming the goods and services produced because of this high level of economic activity. As a result, a recession takes place. Just like the automobile example, excessive economic activity in one particular period leads to deficient economic activity in the following periods.
In order to understand the concept of an overheating economy, we first need to understand the concepts of actual GDP and potential GDP. The actual GDP is the sum total of the goods and services that were actually produced within a country in a given year. On the other hand, potential GDP is a hypothetical total of goods and services which could be produced in an economy in a given year, if the resources were fully utilized at an optimum level.
The technical definition of an overheated economy is when the actual GDP of a country is more than its potential GDP. Hence, if the human, as well as natural resources of a country, are being utilized more than they actually should be, then it can be said that the economy is overheated.
Some of the common features of an overheated economy are as follows:
To sum it up, economic overheating is not something that happens overnight. It is a long process which takes place because of several inappropriate economic policies which have been continued for extended periods of time. Also, there are clear-cut indicators which signal that the economy is overheating. These indicators have been mentioned above for reference.
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