Over-heating of Economy
- June 10, 2023
- Posted by: OptimizeIAS Team
- Category: DPN Topics
Over-heating of Economy
Subject: Economy
Section: National INCOME
Context: India can grow for a prolonged period without running into overheating problems says CEA
An overheated economy is when the economy grows too fast. An overheated economy reaches the limits of how much output it can produce to meet the demand while using all the resources available.
Characteristic of overheating:
- The economy is producing beyond its potential output or beyond full employment.
- Potential output is the output an economy can sustainably produce given the available amount of resources such as workers, technology, and equipment.
- The optimum employment level is called the natural rate of unemployment (NRU). Any lower unemployment cannot be achieved without.
- High inflation is a main sign that an economy is beginning to overheat.
- It is generally caused by an increase in demand for goods due to low interest rates.
- It can be addressed by raising interest rate.
| Wage-price spiral When the economy overheats some producers are not able to supply all the goods that consumers demand. This can lead to prices rising faster than they otherwise would. This in turn can cause a “wage-price spiral” to develop, where higher prices lead to higher wages and vice versa. Wage-price spirals are more likely to occur when an economy is close to full employment, because employers need to offer higher wages in order to attract new workers or retain existing workers. |
Why Indian economy should not overheat:
- Sound macroeconomic policies of the government, structural reforms such as GST, IBC etc, thrust on infrastructure and digitalisation has ensured that the Indian economy can grow for a longer period.
- Fiscal prudence for fostering macroeconomic stability, better credit rating translates into lower cost of borrowing by the government, thus contributing to a fiscal stimulus for the economy.