assgnmt 2 uk economy

8/8/2019 Assgnmt 2 UK Economy

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CENTRE EXECUTIVE EDUCATION

U.K Economy

Business Environment

Ms. Rashida Yvonne Campbell11/22/2010


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Contents

Mini-Project ................................ ................................ ................................ .......................... 3

In your project answer the following questions ................................ ................................ ..... 3

1. What kind of economy is the UK economy? Explain and mention the advantages and

disadvantages of its economic system. ................................ ................................ ................. 4

2. Is the UK economy developed or developing? If it is developed, what are the major factors

that contributed to its development? If it is developing, what need s to be done to

encourage development? ................................ ................................ ................................ ..... 6

3. What is the per capita income at the present? ................................ ................................ .. 7

4. What is the rate of economic growth at the present? Explain. ................................ .......... 7

5. At what phase of the business cycle do you think the economy is at the present and why?

................................ ................................ ................................ ................................ ............. 9

6. What are the chances of long-term economic growth? ................................ ................... 12

7. Does the country have any unemployment problems? Explain ................................ ....... 14

8. Describe recent trends in the role and power of trade unions in the UK. ......................... 15

9. What is the unemployment rate now? ................................ ................................ ............ 16

10. Does the country have inflation problems? Explain ................................ ....................... 17

11. What is the inflation rate (or deflation rate)? ................................ ................................ 17

12. Discuss the infrastructure and its role in economic development. ................................ . 18

13. Discuss the recent social welfare and industrial policy in that country. What is their

impact on the economy? ................................ ................................ ................................ .... 19

14. What is the present fiscal policy? How is fiscal policy affecting the economy? Do you

agree with that fiscal policy? ................................ ................................ ............................... 20

16. Evaluate the impact of the global economy on the UK economy. ................................ .. 22

Bibliography ................................ ................................ ................................ ........................ 23

References ................................ ................................ ................................ .......................... 23

Websites ................................ ................................ ................................ ............................. 23


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Mini-Project

In your project answer the following questions

1. What kind of economy is the UK economy? Explain and mention the advantages anddisadvantages of its economic system.

2. Is the UK economy developed or developing? If it is developed, what are the majorfactors that contributed to its development? If it is developing, what needs to be

done to encourage development?

3. What is the per capita income at the present?4. What is the rate of economic growth at the present? Explain.5. At what phase of the business cycle do you think the economy is at the present and

why?

6. What are the chances of long-term economic growth?7. Does the country have any unemployment problems? Explain.8. Describe recent trends in the role and power of trade unions in the UK.9. What is the unemployment rate now?10.Does the country have inflation problems? Explain.11.What is the inflation rate (or deflation rate)?12.Discuss the infrastructure and its role in economic development.13.Discuss the recent social welfare and industrial policy in that country. What is their

impact on the economy?

14.What is the present fiscal policy? How is fiscal policy affecting the economy? Do youagree with that monetary policy?

15.What is the present monetary policy? How is the monetary policy affecting theeconomy? Do you agree with that policy?

16.Evaluate the impact of the global economy on the UK economy.


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1. What kind of economy is the UK economy? Explain and mention

the advantages and disadvantages of its economic system.

The United Kingdom (UK) is a major developed Capitalist economy (free market economy).

The British Economy is one of the most globalised economies in the world, the capital -

London is considered to be the largest financial centre in the world. The economy of theUnited Kingdom of Great Britain includes the economies of England, Scotland, Wales and

Northern Ireland. Capitalism is an economic system in which investment in and ownership

of the means of production, distribution, and exchange of wealth is made and maintained

chiefly by private individuals or corporations, especially as contrasted to cooperatively or

state-owned means of wealth. Under a Capitalist society framework there exists little or no

intervention from the government (laissez-faire). The government relies on market forces to

operate through the price mechanism-forces of supply and demand.

However, Economists claim that no economy is totally free, hence some government

intervention is administered. The UK government interventions include public, merit and de -

merit goods and services such as: the National Health Service, Education, Defence, Policing,Law, Churches, Parks, Street-Lighting, Garbage collection, tobacco and alcohol etc. (Health

and Education is also available via privately owned companies)

A Free Market Capitalist Economy creates advantages and disadvantages discussed below:

Advantages:

y Capitalist economies provide equal opportunity to individuals of the state. Wealthand growth of the individual depends upon efforts and merit. Allowing members of

the society to adopt creative thinking and innovation, skills that are acquired by

entrepreneurs.

y There are no limitations to the amount of wealth and progression an individual canaccumulate.

y Rational self interest in market economies are also encouraged (allow freedom forpeople to do what they want, make what they want, and, sell what they w ant to a

certain extent, this can also be described as being able to decide what is going to be

produced, how it is going to be produced and for whom it is going to be produced).

y Market economies can adjust to change easily. If there is a demand for one thing,companies have the ability to change what they produce instead of having to go

through too much government protocol first.

y Capitalists economies generate a vast variety of goods and services for consumers. Ifthere is a demand for a good or service, the demand will almost always be met.

y Free Market Economies operate highly competitive business environments.Competition is one of the basic reasons why there are generally so many different

varieties of goods/services at competitive prices and high quality standards,

providing increased consumer choice.


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Disadvantages:

y Entrepreneurs work harder and possess skills that other members of society do not.They are able to build stronger positions of wealth. This will eventually lead to

inequality of wealth within the economy. There tends to be a rise in inequality as

benefits of capitalism are not equitably distributed. As wealth tends to redound to a

small percentage of the population, the demand for luxury goods is often limited to a

small percentage of the workforce, one of the main capitalism disadvantages.

y Another disadvantage of capitalism is that firms gain monopoly over power in a freemarket allows and exploit customers by charging higher prices. They often pay lower

wages to workers. Example: The London Underground once privatised created

phenomena, initially the employees experienced low wages which caused them to

participate in active striking, and London Underground increased wages and also

increases ticket prices yearly.

y Immobility of resources are one of the main problems of capitalism is that a freemarket is supposed to be able to easily move factors of from an unprofitable sector

to a new profitable industry. However, this is much more difficult practically.

y Inequality of wealth in a truly Capitalist society with no Government welfare greatpoverty is bound to occur. Leading to homelessness etc.

y Lack of Government intervention (except to prevent monopolies from occurring),some companies can dominate the industry. If you take a look at Wal-mart, you see

that Wal-mart dominates a lot of the USA industry. They have also driven out a lot of

small business and perpetually dictate what goes on. Wal -Mart has managed to cut

out smaller shops and stores by maximising on its economies of scales. Large

companies have the ability to sell items at a loss until they dominate the market

share of customers and this pushes out smaller competition. y Circular flow of income remains concentrated in a few hands and has limited

circulation for the benefit of all; the downtrodden masses remain dependent on the

"trickle down" effect.

y Capitalism is an inherently expanding social order in which the goals and powers ofprofit-seeking private investors are the most important force shaping society; this

could be the reason for the loss of extended families and the creation of nuclear

ones. As people focus primarily on work and move locations to progress in their

careers and materialistic lifestyles.


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2. Is the UK economy developed or developing? If it is developed,

what are the major factors that contributed to its development? If

it is developing, what needs to be done to encourage

development?

The term developed country is used to describe countries that have a high level of

development according to some criteria. Which criteria and which countries are classified as

being developed, is a contentious issue and is surrounded by fierce debate. Economic

criteria have tended to dominate discussions. One such criterion is income per capita;

countries with high gross domestic product (GDP) per capita would thus be desc ribed as

developed countries. Another economic criterion is industrialization; countries in which the

tertiary and quaternary sectors of industry dominate would thus be described as developed.

More recently another measure, the Human Development Index, which combines with an

economic measure, national income, with other measures, indices for life expectancy and

education has become prominent. This criterion would define developed countries as those

with a very high (HDI) rating. However, many anomalies exist when determining"developed" status by whichever measure is used.

Source adapted from:http://en.wikipedia.org/wiki/Developed_country

The United Kingdom has passed through the Economic stages of industrialisation as

determined by Economist as reaching the developed stage. Therefore the United Kingdom is

a major developed capitalist economy. It is a leading global trading nation, being the second

largest exporter and third largest importer of commercial services, and the tenth largest

exporter and sixth largest importer of merchandise. As well, its a member of the European

Union; the worlds largest trading entity, with nearly 500 million consumers and a GDP of

approximately US$17,000 billion.

The UK is one of the most competitive locations in Europe for business and personal

taxation, and has low unemployment (with an unemployment rate well below the European

Union average), and has the best European city London in which to do business.

The annual ICT Development Index, which was compiled by the International

Telecommunication Union, has ranked UK as the 10th most developed country in the world

of communication and information technology, but this position is not quite remarkable as

it lags behind other European neighbours as the prices of fast speed internet are quite

higher in the UK.

In this indexing UK has been placed at tenth in world and its ahead of the likes of Germany

and the United States, but the country fell behind Korea, Sweden and Denmark. Source

adapted from: http://www.itu.int/ITU-D/ict/publications/idi/2009/index.html


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3. What is the per capita income at the present?

Per capita income is a useful economic indicator for an area. Basically, the per capita income

is how much income each individual of a population would receive if the area's total income

were divided equally among all members of the population. It provides a general average

indication of wealth per person. Not an absolute or accurate measure of income, as theincome scales vary from one individual to another. Per capita income is often used as a

measure of the wealth of the population of a particular nation , especially when compared to

other nations.

The Business Dictionary defines per capita income as "total national income (GDP) divided

by total population." Total population includes childr en, elderly people and those out of

work, which means that per capita income does not indicate a country's average salary, but

the income per person. According to the Business Dictionary, it serves to estimate a nation's

living standards. (http://www.businessdictionary.com/definition/per-capita-income.html)

The UK has a population of more than 61m and a GDP per capita is US $37.4k, which makes

it the 30th richest country in the world, above the European Union average of US$33.8k.

4. What is the rate of economic growth at the present? Explain.


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Notice in the above diagram there have been two recessions in the last twenty-five years.

The early 1980s downturn was a deep recession the worst downturn in the UKs post -war

history. We can see the descent into recession in 1990 and 1991 and then a recovery which

was maintained throughout the remainder of the 1990s.

Judging from the above information we can now decide at wha t stage of growth the UK

economy is at. The diagram shows post 2006 the UK has lead into Decline and early 2009

the credit crunch has lead the UK into recession. The guardian (British newspaper) released

an article on Tuesday 26 January 2010 reporting Britain's economyfinallyclawed its wayout

of its deepest recession since the 1930s in the fourth quarterof 2009, but itonlymanaged to

expand bya much weaker than expected 0.1%. Shadow chancellor George Osborne said,

After this great recession, any signs of growth are welcome. But these veryweak growth

figures show that Gordon Brown's government leftus badlyprepared for the recession and

badlyprepared for the recovery. We urgentlyneed a newmodelof economic growth that

includes a credible deficit reduction plan that keeps mortgage rates low, creates jobs and

doesn't choke off recovery."

Over the last ten years, GDP growth in the UK has regularly outpaced or matched growth in

the European Union. As with other major countries globally, the UK e conomy contracted in

2009, due to the Credit Crunch Crisis. UK manufacturing grew at its fastest pace for 15

years in Q1 of 2010 aided by a weak pound, but a reduction in the services sector has seen a

slow to negligible rate of recovery in 2010.

The United Kingdom' financial exports contribute significantly towards the balance of

payments. The UK has had an expanding export business in financial service, at least partlydue to the presence of a regulatory structure now accepted by the Government as

inadequate.

The UK property market boomed for the seven years up to 2008 and in some areas property

trebled in value over that period. The increase in property prices had a number of causes:

sustained economic growth, low interest rates, the growth in property investment, and

planning restrictions on the supply of new housing . (Retrieved from

http://tutor2u.net/economics/revision-notes/as-macro-uk-economic-cycle.html )


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GDP Growth

Economy grows by 0.7% in Q3 2010

Real GDP quarterly growth

GDP growth has been revised down to 0.7 per cent in the latest quarter from 0.8 per cent

previously published. GDP in the third quarter of 2010 is now 2.7 per cent higher than the

third quarter of 2009.

Output of the production industries was revised down to 0.5 per cent in the latest quarter.

http://www.statistics.gov.uk/cci/nugget.asp?id=192

5. At what phase of the business cycle do you think the economy is

at the present and why?

The business cycle of a countrys economy involves the study of macro -economics. Before

deciding at what phase the UK is at according to the Business Cycle we must firstly

understand what the Business Cycle is:

The regular pattern of fluctuations-upturns and down-turns in demand andoutput

within the economy, measured bygross-national product (GNP). Left to themselves, all

market economies repeat themselves everyfive years or so. The causes of this cyclical

pattern to economic activi tyare not fullyknown. It can be partlyexplained bygross -

national-product which is calculated byadding the value of all the production of a country

plus the net income from abroad -that is overseas investments minus the income earned byforeigners investing in the domestic economy. Government policies affect the GNP and the

economic stages of the business cycle. For example government injecting investments into

the economymeans increased spending leads to greater business prosperityand

productivity. Government policies on inflation, interest, unemployment etc all affects the

UKs economic stage. The Business Cycle in general has four phases/stages:

1. Boom/Expansion/Peak


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2. Decline3. Recession/Slump/Depression4. Recovery5. The Economic Business Cycle has existed forover 150 years.

y Definition of the Economic Business Cycle has been searched via two methods:http://www.businessdictionary.com/definition/capitalism.html

y Complete A-Z Business Studies Handbook, 5 th Edition, Prof. David Lines, Ian Marcouse, BarryMartin, publishers Hodder Education.

A diagram below explains the basic pattern of a business cycle and the four stages.

The Business Cycle

Diagram A

EconomicActivity

General Trend

1 Boom 2 Decline 4 Recovery

3 Recessions

Time


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Diagram B

In diagramA it shows the general pattern of the business cycle. Diagram B shows the

growth rate of the UK since 1970. It is clear to see the four stages of the business cycle everyfive years. From the year 2000 to 2005 it shows a steady decline, phase/stage 2 of the

business cycle.

Even before the credit crunch took hold, eco nomists were expecting a slowdown of growth,

both in the UK and in every major economy. However, theres little doubt that the recent

crisis has helped to deepen the concerns surrounding the housing market and the wider

global economy. Problems first surfaced when the consequences of an over -inflated

housing market, and cheap mortgage loans to high-risk (sub prime) homebuyers, began to

have a damaging effect on the US economy. Sharply rising interest rates meant that

suddenly, millions of homeowners face d the prospect of losing their home .

Credit became very expensive or virtually impossible to obtain and confidence in all financial

institutions rapidly disappeared. And then panic ensued. People fell back on their credit

payments and in extreme cases unable to pay. The problem stems from money lenders

issuing out loans and credit to easily and willingly to vast majority of the population. Interest

rates were used as bargaining power between one money lender and another, stealing

customers from each other.


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Finally the Guardian also quoted:

"Today's fourth-quarter GDP numbers have confirmed that the UK has finally exited

recession but barely," said James Knightley, economist at ING financial markets.

Some analysts think the economy has only returned to g rowth at all because of the

extraordinary support from the Bank of England in the form of ultra-low interest rates and

200bn of "quantitative easing", as well as the government allowing the budget deficit to

expand hugely.

David Frost, director general of the British Chambers of Commerce, said: "This is good news,

but clearly growth is anaemic, and it certainly means that the economy is far from being out

of the woods."

Although there has been only a slight upward movement in the UK economy it is not enough

to classify as moving out of recession into recovery. It is difficult to predict exactly when the

economy will move from one stage to the next. It is clear th at most of the worlds

developed markets are either already in or heading towards recession. The impact of the

credit crunch could therefore be felt for a few more years.

6. What are the chances of long-term economic growth?

Economic growth is the increase of per capita gross domestic product (GDP) or other

measure of aggregate income. The UK has enjoyed steady, if not spectacular, economic

growth during Labour's ten years in office the longest uninterrupted period of growth in

200 years. It has been helped by the strong world economy, and by rising immigration and

public spending. If interest rates rise further, that could slow future UK growth. Below are

diagrams and an economic explanation of factors that contribute to long -term economic

growth:


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An increase in Aggregate Demand (AD)

In the short term, economic growth is caused by an increase in AD. If there is spare capacity

in the economy then an increase in AD will cause a higher level of Real GDP.

AD can increase for the following reasons.

y Lower interest rates this reduces the cost of borrowing and so encourages spending andinvestment

y Increased wages. This increases disposable income and encourages consumer spendingy Increased Govt spending. G is a component of AD

Classical Economists argue that an increase in AD will only increase Real GDP in the short

term. They argue that the LRAS is inelastic therefore higher AD only causes inflation.

This is disputed by Keynesians. They believe the LRAS can be elastic, e.g. in a recession

Long Term Economic Growth

This requires an increase in the Long Run Aggregate Supply as well as AD.

LRAS or potential growth can increase for the following reasons


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1. Increased Capital e.g. investment in new factories or investment in infrastructure such as

roads and telephones.

2. Increase in working population

3. Increase in Labour productivity, through better education and training

4. Discovering new raw material

5. Technological improvements to improve the productivity of Capital and labour e.g.

Microcomputers and the internet have both contributed to increased economic growth.

The government must apply the correct formula combining Fiscal, Monetary and Industrial

policies to sustain long-term economic growth.

7. Does the country have any unemployment problems? Explain

There are three main types of unemployment, frictional, real wage and demand deficient.

Frictional unemployment almost always exists and little can be done to reduce its level to

zero. It occurs when one worker moves from one job to another and it is recorded on the

statistics. The second major type of unemployment that exists in the UK at present is Real

Wage, this occurs as a basic form or cyclical unemployment and occurs simultaneously with

the Business Cycle again lasting for a period of 5 years plus. Real Wage unemployment is

due to an excess supply of labour in the economy. Demand deficient unemployment occurs

when there is a deflationary gap, thus aggregate supply exceeds aggregate demand. For the

UK it is the Financial sector that experienced the initial impact of this type of

unemployment, with the other sectors that shortly followed.

The UK has a highly skilled, flexible and dynamic labour market, with less labour regulation

than most other European countries. Skills are particularly strong in the UK, with many

world-class universities and centres of research and development located across the

country. London is consistently ranked as the leading European location for the availability

of qualified staff.

Employment is currently at high levels with 28.86 million people in work, comprising 21.16

million in full-time work and 7.7 million in part-time work. The employment level (the

proportion of working age people in work) is also high in the UK at 72.2 per cent, compared

with the European Union average of 64.8 per cent.

The UKs unemployment rate (using the internationally comparable standardised rate) of

7.8 per cent is significantly lower than the European Union average of 9.5 per cent. The

annual rate of growth of average earnings across the UK economy stood at 0.9 per cent in

January 2010.


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The economy is expected to recover in 2010, but give the depth of the recession; output iswell below full capacity. It would take a long period of economic growth to overcome the

spare capacity. As economic growth increases unemployment levels reduce. Factors and

economic indicators that contribute to the recovery and unemployment issues are the

following:

y Unprecedented monetary policy of 0.5% interest rates and quantitative easingy 20% depreciation in the Value of Sterling helps exporters and domestic demandy Signs of Stronger recovery in Europe our main trading partnersy House price falls have ended in 2009, this should help stabilise wealth and

confidence

8. Describe recent trends in the role and power of trade unions in

the UK.

A trade union (British English) or labour union (American English) is an organization of

workers who have banded together to achieve common goals such as better working

conditions. The trade union, through its leadership, barga ins with the employer on behalf of

union members and negotiates labour contracts (collective bargaining) with employers. This

may include the negotiation of wages, work rules, complaint procedures, rules governing

hiring, firing and promotion of workers, benefits, workplace safety and policies. The

agreements negotiated by the union leaders are binding on the rank and file members and

the employer and in some cases on other non-member workers.


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Trade unions in Britain experienced a serious decline from the time of the election of

Margaret Thatcher's Conservative government in 1979. Thatcher passed new union

legislation, which was largely seen as a direct response to the actions of trade unions during

the Winter of Discontent of the previous year. At that point the level of union participation

in the UK was around 80% of the workforce. Thatcher was committed to reducing the power

of the trades unions. Several unions launched strikes in response to legislation introduced to

curb their power, but these actions eventually collapsed, and gradually Thatcher's reforms

reduced the power and reforms of the trade unions. In 1982 the National Union of

Mineworkers accepted a Government offer of a 9.3 percent raise, rejecting their leaders'

call for a strike authorization. No doubt the majority of trade unionists now are office

workers or shop workers - industrial workers have become a minority. Initially many writers

considered that such white collar employees would necessarily be less militant than blue

collar workers. The rise in strike action by white collar workers in the 1970s contradicted

this thesis.

9. What is the unemployment rate now?

The number of people unemployed in the UK rose by 53,000 to 2.51 million during the three

months to March, official figures have shown. The unemployment total is now at its highest

level since December 1994.

However, the total number of people claiming unemployment benefit fell in April by 27,100

to 1.52 million - a sharper fall than expected.

The rate of unemployment remained at 8%, the Office for National Statistics said. There was

also a rise in the number of people classed as economically inactive - those out of work and

not seeking work. They rose by almost 100,000 to a record total of just under 8.2 million.

The ONS figures showed youth unemployment rising, with 941,000 16 to 24 -year-olds out of

work in the January to March period - a rise of 18,000 on the previous three months. The

number of over-50s out of work for more than a year climbed 12,000 on the quarter to


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146,000. And 1,066,000 people said they were working part -time because they could not

find a full-time job - up by 25,000. Retrieved from http://news.bbc.co.uk/2/hi/business/10109965.stm

10. Does the country have inflation problems? Explain

Inflation in Britain rose to a 17-month high of 3.7 percent in April, almost double the central

bank's 2 percent target, and has been surprisingly sticky in recent months. It is a long way

above our target level now but we have to take a long-term view.

The effect of changes to interest rates takes six to 12 months to come through. We believe

inflation will have also dropped by then. The economy would fare in the coming months was

difficult due to the uncertainty caused by the euro zone's sovereign debt crisis.

The euro zone problems in particular pose a risk to the fragile recovery of the UK economy.

Europe is our biggest export market and we factor that risk into our judgements. Bank of

Englands powers are expected to be enhanced by the new coalition government's decision

to give the central bank greater regulatory oversight. Retrieved from:

http://www.reuters.com/article/idUSLAH00674320100524

11. What is the inflation rate (or deflation rate)?The Bank of England has full operational independence in setting interest rates to meet the

Governments inflation target of 2 per cent for the annual increase in the Consumer Price

Index (CPI). The CPI is based on the internationally comparable Harmonised Index of

Consumer Prices. In March 2010, the CPI stood at 3 per cent.

from:http://www.reuters.com/article/idUSLAH00674320100524


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12. Discuss the infrastructure and its role in economic

development.

An infrastructure is a relatively permanent and foundational capital investment of a

country, firm, or project that underlies and makes possible all its economic activity. It

includes administrative, telecommunications, transportation, utilities, and waste removal

and processing facilities. Infrastructure also includes education, health care, research and

development, and training facilities.

http://www.businessdictionary.com/definition/infrastructure.html#ixzz18slLdgBm

In addition to the above definition the existence of Entrepreneurs are also an essential

contributor to the infrastructure, some Economists consider entrepreneurs to be the 4 th

factor of production. In developed economies all these elements constitute a developed

infrastructure. For an economy to move from the recession stage to the recovery stage of

the economic business cycle Entrepreneurs and Firms depend upon the Countries

infrastructure. Therefore a reliable infrastructure and government investment to improve

the infrastructure is a critical component towards economic growth and sustainability. The

government needs to focus on a strategic infrastructure plan to get the country moving

again. The infrastructure provides as the basic input into production locally, nationally and

internationally. High quality infrastructure assets enhance a countrys national output. A

large part of the private sectors productivity growth is connected to the size and quality of a

countrys infrastructure base and annual investment in it. Infrastructure spending generates

a large multiplier effect across the whole economy creating additional demand for materials

and services.

Example:

An Entrepreneur desires to set up a manufacturing firm in a rural area; this firm needs

infrastructure provisions such as gas supply, clean water, electricity, roads, waste disposal

and human resources etc. The economic nature of the infrastructure contribution depends

upon its relationship to other inputs in the productive process. The firm has very little or no

possibility of substituting for an infrastructure input such as clean water, therefore a certain

quality and quantity of provision is a necessary component in the production process then

important implications arise for economic growth. The firm will seek moving to a locality

where infrastructure is in surplus.

Similarly foreign investors and businesses seek such developed infrastructures along side

government economic policies. This attracts national, international and global enterprises toset-up in the UK.


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13. Discuss the recent social welfare and industrial policy in that

country. What is their impact on the economy?

Industrial policy forms part of government economic policy, and its goal should be to

maximize the welfare of citizens. In developed economies open to the world market, this

goal is closely linked to the competitiveness of companies and overall productivity of the

economy. The competitiveness of an economy refers to the ability of its companies to

compete in the international market. A company will have a competitive edge over rival

companies if it can produce the same products at a lower cost or better products at the

same cost that is if it has the edge in terms of cost or demand (product quality and variety).

Obviously, other policies like monetary and exchange rate policy, fiscal policy, incomes

policies or labour market reforms also affect the competitiveness of firms, but we do not

include them under the definition of industrial policy. Industrial policy has evolved over the

course of the post-war era. The 1960s and 1970s were marked by the fostering of national

champions, indicative planning, and state -owned firms with the objective of narrowing thetechnological gap with US and Japan. This was also the period of trying to pick winners b y

selecting industries that were forecasted to be successful or that had such potential if

appropriate help was given (those industries also typically had important externalities for

the rest of the economy).

The Industrial policy has a direct affect on t he social-welfare, welfare as an essential

complement to industrial development: social policy helps the economy to grow by serving

the workforce, providing services to industry and offering a secure basis for development.

Some Economists view that spending on welfare as a useful economic regulator, helping to

balance the economy in periods of recession.


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14. What is the present fiscal policy? How is fiscal policy affecting

the economy? Do you agree with that fiscal policy?

Fiscal policy is the method that governments use to decide what it wants to spend, how

much it needs to raise and borrow. Government's revenue (taxation) and spending policy

designed to counter economic cycles in order to achieve lower unemployment, achieve lowor no inflation, and achieve sustained but controllable economic growth. In a recession,

governments stimulate the economy with deficit spending (expenditure exceeds revenue).

During period of expansion, they restrain a fast growing economy with higher taxes and aim

for a surplus (revenue exceeds expenditure).

http://www.businessdictionary.com/definition/fiscal-policy

During Gordon Browns stint as Chancellor, the Labour Party officially adopted the Golden

Rule of fiscal policy. The Golden Rule states that over the full economic cycle, the

government should borrow to invest only for future needs. Current needs should be met by

tax revenues. This should allow for stable finances as defined by the ratios of public sector

net worth, debt and current expenditure to national income.

In conjunction with the Golden Rule, the UK government also seeks to follow the

Sustainable Investment Rule, which should keep national debt at a prudent level currently

set at 40 per cent of GDP.

By the end of 2008 estimated public debt had already risen to 42 per cent, and could rise to

70 per cent of GDP by 2010, meaning that the Sustainable Investment Rule has been

broken.http://www.economywatch.com/world_economy/united-kingdom/bank-of-england-monetary-fiscal-

policy.html

Gordon Browns fiscal policy actions had led the UK into immense public deficit. UK Prime

Minister David Cameron said monetary policy should take the strain of boosting demand

and he argued the government should stick to its plans to remove the structural deficit

during this parliament. Cameron argued that monetary policy should act to

offset weakness rather than fiscal policy. http://www.forexlive.com/138354/all/uk-

cameron-backs-monetary-activism-fiscal-conservatism

However during 2010 under Conservatism, the increase of V.A.T has increased from 15%

back to its original 17.5%. Clearly David Cameron is applying a mixture of Fiscal and

Monetary policies to combat the recession.


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15. What is the present monetary policy? How is the monetary policy affecting the

economy? Do you agree with that monetary policy?

Monetary policy is the Economic strategy chosen by a government in deciding expansion or

contraction in the country's money-supply. Applied usually through the central bank, amonetary policy employs three major tools: buying or selling national debt, changing credit

restrictions, and changing the interest rates by changing reserve requirements. Monetary

policy plays the dominant role in control of the aggregate-demand and, by extension, of

inflation in an economy. http://www.businessdictionary.com/definition/monetary-

policy.html

As of Q1 2009, the Bank of England has already cut Interest Rates to a historic low of 1.0 per

cent, with the consensus believing this will drop to 0.5 per cent. Further measures are

probably needed, and this will include quantitative easing, in other words printing more

money. Up to 150 billion GBP in new money is expected to be pumped into the economy in

2009.

The Bank of Englands balance sheet will probably continue to grow as it shores up mo re

banks and financial institutions with both capital injections and loans, and as it acquires

Government Treasury bills to help finance the stimulus package will attempting to limit the

crowding out of private borrowers.

Due to the present economic state that the UK is currently within, advocating the monetary

policy is a more powerful weapon than fiscal policy in controlling inflation and the necessary

steps to bringing the UK out of recession to increase its economic growth . Monetary policy

also involves changes in the value of the exchange rate since fluctuations in the currency

also impact on macroeconomic activity (incomes, output and prices) .

Changes in short term interest rates affect the spending and savings behaviour of

households and businesses ov er time and therefore feed through the circular flow of

income and spending. The transmission mechanism of monetary policy works with variable

time lags depending on the interest elasticity of demand for different goods and services

e.g. the demand for interest-sensitive consumer goods and services bought on credit or the

demand for capital investment from private sector businesses.


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16. Evaluate the impact of the global economy on the UK

economy.

The term Global Economy refers to an integrated world economy with unrestricted and freemovement of goods, services and labour transnational. It projects the picture of an

increasingly inter-connected world with free movement of capital across countries, also. The

concept of a global economy cannot be understood in isolation. For this, globalization nee ds

to be defined first. Globalisation may be defined as the integration of production and

consumption in all markets across the world.

The main impact of the global economy on the UK economy is inflation and t he financial

sector. The Financial services industry is a major contributor to economic activity and

growth in the UK, accounting for nearly 10% of total GDP. Because of the international

nature of financial markets, the financial services industry is heavily influenced by global

economic developments. These financial linkages to global markets are just one of the many

ways in which broader international developments affect the UK economy. Global economic

developments such as the recent turbulence in financial markets also have an important

bearing on the decisions of the Monetary Policy Committee (MPC).

In an open economy like the UK, global forces can cause inflation to fluctuate around its

target level in the short term, and also inject volatility into the real economy. The rising oil

and commodity prices driven by strong global demand push up inflation in the UK and other

major economies over the past couple of years. By contrast, the recent changes in global

financial market conditions could weaken demand conditions in the UK and internationallyexerting downward pressure on inflation.

There are a wide variety of ways in which global economic developments impact the UK

economy and hence influence the rate of inflation. The whole process of globalisation has

structural effects on the UK economy, including the impact of labour migration. The first of

these is the impact of the prices of imported goods and services. Directly and indirectly,

imports account for around 30% of the value of goods and services sold by UK business at

home and abroad.

The second channel of influence from the global economy is via demand. Strong growth of

demand whether it originates at home or abroad allows profit margins to expand and can

put upward pressure on costs, particularly when the economy is operating close to itscapacity limits. By the same token, weak demand exerts a dampening influence on cost and

price increases. Influencing demand conditions through interest rates is one of the main

ways through which the Monetary Policy Committee controls UK inflation.


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Bibliography

Title: Dictionary Business & Management

Edition: 2nd

, 2004

Publisher: Bloomsbury Publishing Plc

Author: Fiona Pike

Title: Complete A-Z Business Studies Handbook

Edition: 5th, 2006

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Author: Professor David Lines, Ian Marcouse, Barry Martin

Title: Business Studies for Advanced Level

Edition: 3rd

, 2008

Publisher: Hodder Education

Author: Ian Marcouse, Malcolm Surridge, Andrew Gillespie

ReferencesBean, C (2006), Globalisation and inflation, Bank of England Quarterly Bulletin,

Q4, pages 468-75.

Besley, T (2007), Consumption and interest rates, Bank of England Quarterly

Bulletin, Q3, pages 471-76.

OECD (2007), Trends and Recent Developments in Foreign Direct Investment:

2007.

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http://en.wikipedia.org/wiki/Developed_country http://www.itu.int/ITU-D/ict/publications/idi/2009/index.htmlhttp://www.businessdictionary.com/definition/per-capita-income.htmlhttp://tutor2u.net/economics/revision-notes/as-macro-uk-economic-cycle.html )

http://www.statistics.gov.uk/cci/nugget.asp?id=192

http://www.businessdictionary.com/definition/capitalism.html http://news.bbc.co.uk/2/hi/business/10109965.stm http://www.reuters.com/article/idUSLAH00674320100524

http://www.businessdictionary.com/definition/infrastructure.html#ixzz18slLdgBmhttp://www.economywatch.com/world_economy/united-kingdom/bank-of-england-monetary-fiscal-

policy.html

http://www.forexlive.com/138354/all/uk-cameron-backs-monetary-activism-fiscal-

conservatism

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assgnmt 2 uk economy

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