UKs Economic Issues - Essay Example

? (UK’s Economic Issues) Presented To By (Insert Question 1a Unemployment in the UK Economic Performance for the Past Five Years The state of unemployment in any given country has a number of impacts in a country’s economy. Uk has not been spared on this issue either. Though the statistics for the last five years have shown a declining trend, fluctuations have been observed. These effects have been not had a positive impact on the economy of UK. Policies have been developed to curb the situation but still it has continued to persist. As per now in accordance to the latest labour statistics from the office of statistics shows that the rate of unemployment stands at 7.8%. This percentage is still deemed high having in mind the fact that UK is one of the most developed countries, which translates to its economy. Its economy ought to be depicting a no or very low unemployment rate. With the population of several millions unemployed, you definitely expect some difficulties in the economy (Clegg, 2013:1-58). This is not only to the directly affected people but also to the government and society at large. The government is deprived of the very income tax it majorly relies on to fund its projects. When people who are both able and willing to work lack the job to do, they do not stop using the resources available. The strain is direct on the people being dependent upon and the government. The government ought to continue offering security, basic healthcare, education and other social needs with nothing in return inform of income tax. The government needs money to run and if this money is not available, the business is bound to go down. The government being a major player in any market, it loses strength and this is what UK had been struggling to fight. The deficits on the budgets have partly been influenced by unemployment as people enjoy services they are not paying for through payment of income tax. In the year 2011/12, the expenditure exceeded the earning collections by ? 1.8 billion. With continued increase of this figure, the population of UK may be subjected to national debt. The purchasing power of the people of UK has gone down. This is primarily because the fluctuations in the unemployment rates have set grounds for uncertainties. For the last five years, the dependency ratio has fluctuated though in average the trend has been diminishing more because of the creation of part-time jobs. It is automatic that when one is not employed, he has no power to purchase anything even if he is willing to do so. This effect has seen the internal demand of goods produced locally go down a bit. Fallen demand has seen the industries reduce their operational capacity some to as low as 75% and this have gone to the worse edges of even risking more people to unemployment. The trend has though gained momentum of improving and the true state of matter today is not what it was five years ago. Effect of Balance of Payment on UK Economy Balance of payment entails a number of things. First, it involves the current account then financial account. Capital balance and net errors and omissions are also taken into account when arriving at the net value of the balance of payments (Krugman & Wells 2009: 600). Goods and services together with income inflows and current transfers are considered for current account (Krugman & Wells, 2009: 600). The financial account is basically a trade of any financial assets. The capital account had been determined by capital asset sale. For the last five years, the balance of payment has also been fluctuating as unemployment has been. The current account has been on the deficit side for a long time. Economists have argued that this is a favourable situation as some countries which have had a large surplus like Japan have remained stagnant in growth but yet UK has been growing since the 1980s when the deficit began (EconomicOutlook, 2010: 60-76). The financial and capital account surpluses have been offsetting the deficit in the current account. The balance of deficit has been persistent due to the basic idea that UK is importing more than it’s exporting. This has been primarily due to the de-industrialization which has seen increased imports for clothes, oil, and other goods. Though the service export has been positive, it has not been able to full cover the goods deficit (Pettinger, 2013: 1-10). Over the last five years, the saving power of the UK population has been down. People have high consuming rate making the urge to save a bit challenging to them. They live in the first world class and want to have anything good that the world can produce irrespective of where it is produced. For this reason, the import a lot and do not care saving. The North Sea oil has been vital in boosting the balance of payments figures but since its diminishing, the economy had just continued to experience a negative value. This case has been worsened by the high value of the UK currency which had made the export more expensive (Pettinger, 2013: 167). The high valuation on the currency has impacted negatively on the competitiveness in the global and domestic markets with everybody finding it cheaper to buy imports than what is domestically produced. This being the case, the local industries suffer market problems and this has reduced the profits which means everything is heading to the wrong direction. In addition, the UK government is consumer spending oriented. The growth of the economy has not been felt as the increased exports had been cancelled by increased imports. The economy performance has been generally poor. Question 1b Why Car Industry UK is dominated by the Oligopoly Oligopoly happens to be one of the most organized markets and difficulty to get in (Ghosh & Morita 2007: 530). This is the structure market that the car or rather the entire automotive industry in UK enjoys. The element of enjoyment comes in from the fact that this market has a lot of benefits to the seller. The sellers are few and can decide on how much they want to offer the market. Freedom of the market is under control and strained as forces of demand are no longer operating freely. Other forces are involved in price setting for the products reaching the market. The car industry in the UK is characterized by a few manufacturers. This sets the ideal case for oligopoly to thrive. Oligopoly markets demands there be few sellers. These few sellers often come together to decide on the way forward of the market performance. Remember that cartels are illegal especially the ones that have intension of harming the buyers but oligopoly market offers some kind of specialized cartels. This “cartels” cannot be compelled by any law. When they meet, they decide on how much to produce. As it is seen in the car industry in UK, the manufacturers were able to sell their products to the people of UK at a 20% higher price than the cost of the same brand in the neighbouring competing countries. By lowering the output, this market artificially forces prices to go high than is necessary or if there were a free market. In the UK car industry, entry is seriously restrained (Ghosh, & Morita, 2007: 542). New manufacturers who want to establish themselves in this business in UK find it difficult as the rules have been preset to control the entry. This is not a like a mixed oligopoly were entry is permissible to some extent (Matsumura & Kanda, 2005: 27-48). For example, the SED i.e. selective and exclusion distribution ensures that dealers are controlled by the manufacturer. This has a direct implication that the dealers only sell what the manufacturers have approved. This is analogous to the kind of tied shops where the shops sell only the products of the company they are affiliated to. This effect makes it very difficult for any new players to establish themselves as it will be expensive to establish all the structures from the manufacturing to the selling. If the SED rule was not in action, it would have been much cheaper as cars from different manufacturers could be sold by one dealer in the same showroom hence enhancing fair market competition which would ensure forces of demand and supply interact freely to determine the price of a particular car. But with these regulations, this market has remained an oligopolistic one. Another fact which explains why the UK car industry has remained oligopolistic in nature is the interdependency of these firms in this industry. Whatever action is taken by one of the players in this industry, the impact is felt by the rest few and it takes a short time to readjust to the new market realities. For this cause, there is a dear need for togetherness in the market and these firms ensure they keep at par to each other (EconomicOutlook, 2010: 60-76). Pricing is not a way of competing as this posse a very great danger of losing the hard earned market share. Market share is of importance and increasing it is concentrated on other things like re-branding. In fact, non-price competition methods have identified this market hence certifying it to be purely oligopolistic. Pricing is by no way a means of increasing the profits as increased price translates that the particular seller looses part of his market share. Besides the non- price competitions exhibited by these firms, when the price changes, the response of the quantity demanded does not change. This is basically because, the manufacturers collude to reduce the product and hike the price. These push the buyers to dig a bit deeper in their pocket to acquire the products. This was the case when Volvo claimed to have the car prices high by fixing it using the SED policy and is bound to happen again in future by another manufacturer(EconomicOutlook, 2010: 60-76). The quantity demanded did not though decline. The elasticity is said to be inelastic. The UK car industry though it has experienced price changes from time to time, demand has remained proportionally constant, giving it another reason it is oligopolistic. The car products can be termed to be fairly similar with differentiation playing an import role in this market. Differentiation means everything in this market. The ideal of merging has also seen the dominancy of the automotive industry in UK. Since entry is difficult, those players who are in it also do not want to exit the market and lose their market share. In case of hardships arising in the economy, merging offers an acme alternative. The merging is also propelled by the desire to enjoy economies of scale and control of the market hence in these endeavours oligopoly in the car industry continues to persist. In conclusion, the future of this market is inevitable. It has a future and seems it will be there for several generations unless new policies that champion for liberalization of the market are put in place. Never the less, this market organization has its benefits which include improved products as the manufacturers now compete on the grounds of quality and exceptionality. Reference List Clegg, R. et al., 2013. Labour market statistics. Office for Natiotional Statistics (January 2013). P1-58 EconomicOutlook, 2010. UK Forecast in Detail. Economic Outlook, 33(2), Wiley-Blackwell p.60-76. Ghosh, A. & Morita, H., 2007. Free entry and social efficiency under vertical oligopoly. Rand Journal of Economics, 38(2), p.541-554. Krugman, P. & Wells R., 2009. Macroeconomics 2nd Ed. Worth Publishers, p 600 Matsumura, T. & Kanda, O., 2005. Mixed Oligopoly at Free Entry Markets.Journal of Economics, 84(1), p.27-48 Pettinger, T., 2013. UK balance of payments. Economics. p 1-10 Read More