What exactly is an "over-heated economy?"?

Answer 1

There is a concept of Natural Unemployment level and the natural out put level in economics. Similarly there is a concept of natural growth rate of the economy.

When the economy is above the natural output (or un employment is below the natural level), the economy is overheating. Also when the economy is growing to fast, it can overheat.

For example, look at the example of the US. Say if the economy is growing at 9%. There will begin to be pressure on the country's resources, as suppliers will not be able to provide supplies at such a fast rate so prices will rise. Also, with unemployment being lower than the natural rate, there will be more demand for workers and wages will rise faster. So in effect, the strong growth will lead to higher prices and inflation. This is an overheated economy. its betetr if the country grows at a slower rate (as the US does).

Answer 2

This loosely worded description could be misleading.

It most probably refers to an economy where too much activity is going on, some parts of which could lead to high inflation.

As long as the costs of doing business are kept under control, the "over heated" economy can continue for a long time.

Whenever the Federal Reserve believes they see signs of inflation, they usually raise interest rates to "cool down" the overheated economy.

Answer 3

Term invented by Journalists in an effort to make consumer statistics seem more exciting ..

... essentially the suggestion is that 'we' are spending 'too much' and this 'can't continue much longer' ...

Usually it comes up every time they look at how much people are spending using Credit Cards .. to discourage this the BoE may raise Interest Rates .. of course eventually their Cards will max. out and the spending will stop ..

When that happens all the companies that have geared up to meet the demand for goods & services will have to cut back - i.e. fire workers, hold down wages - and this will lead to a recession - as those out of work cut back spending further and people start to default on their Credit Card debt due to the higher Interest Rates