Business in the United Kingdom - Literature review Example

Business in UK The Nature and Purpose of Central Government in Managing the Economy The central government has delivered cautious economic management since last one decade. This particular approach has result a strong financial position of UK. The public sector in UK that entails government spending, borrowing and revenue rising has played a crucial role in the mixed economic structure in UK after the economical slowdown. Several purposes of government expenditure and managing the economy are: To supply products and services, such as public goods, such as roads, bridges and defence; merit goods, including schools and hospitals; and welfare benefits, such as disability and unemployment benefit. To reduce the affects of externalities like pollution control. To help reallocate income and attain more equity. To attain supply-side development in the macro-economical structure and policies, including spending on training and education in order to improve staff productivity. Financial support to the loss making subsidize industry. For an example, UK government has provided sufficient subsidies to the banking sector in order to deal with the affect of financial crisis. To infuse additional spending in the macro-economical structure in order to increase the economic activity and aggregate demand. It is the nature of the central government that, they use public spending in order to stimulate the aggregate demand and economic activity. It is one of the key options for the effective economic management. According to the British Economist, Mr. Keynes, the public spending needs to be increase when the private investment and spending is unbalanced and inadequate. There are two categories of spending, such as Capital spending and current spending. Capital spending considers spending on the physical assets, including roads, bridges, schools, and hospitals. On the other hand, current spending includes expenditure on raw materials and wages. The impact on business of Changes in Monetary and Fiscal Policy Government describes fiscal policy by writing legislation and setting taxation level. The changes in fiscal and monetary policy can affect the businesses both directly or indirectly. The impacts are highlighted below. Fiscal policy Fiscal policy generally engages changes in spending and taxation policies. Lower tax considers high disposable income for people and more cash to invest for business in equipments and jobs. On the other hand increasing consumption of taxes or income usually address less disposable income for people that can be decelerate the activities linked with the business (Ruddock, 116). It is evidenced that increasing ageing population and budget deficits should be addressed in order to sustain the long term business growth. Monetary policy Changes in the short-term interest rate generally manipulate long-term interest rates. Mortgage rate is the effective example of it. Low interest rate stands for higher disposable income for people and limited interest expense for a particular business. The combination of these two considers high business profit. High interest rate can affect the business firms as it results Lower sales and profit and higher interest expense. Changes in the interest rate have negative impact on the stock prices that can affect consumer spending. Taxation Several taxation policies have negative impacts on the business cost. For an example, high corporate tax and increase in corporate costs have the same effect. Organizations can pass some of these taxes in high prices on the buyers, but end of the day it has a negative impact on the bottom line. Other business taxes are VAT and Environmental tax. VAT is actually implemented on the final customers but VAT system administration is the cost for business. Interest rates Interest rate is a particular economic policy that is determined by the government appointed group and the monetary policy committee. Rise in interest rates can raise the business cost of borrowing money. Moreover, it causes the buyers to reduce the expenditure. Privatization Privatization has bought several significant improvements in the economic efficiency in UK. These businesses became very much independent and free to invest and borrow. On the other hand, privatization is very much expensive and used to generate huge income for the expert advisers like banks. Extended share ownership did not taken place as some small investors used to take away their profits against buying nothing. Legal Changes The government regularly changes political policies and laws related with external environmental factors. Some legal change’s example includes: In UK, the newly developed National minimum Wage has been extended to the individuals of below 18 years. Offering developing secured protection for the buyers to protect them against inadequate business practices. Creating strict rules in order to constitute healthy and fair competition between the businesses. Now-a-days, British business is getting highly affected by the EU directives and regulations. Moreover, several national laws and requirements are also affecting the business practices. Implication of Changes on Economy, Business and Society Inflation Generally people save money and maintain a balance between spending and savings. Savings flow to the banks where they transformed to loans for the future business investment. In the time of inflation people stats to borrow more comparing to the savings. Due to inflation the interest rate rises. As a result it increases the business cost. Moreover, it results less borrowing and less investment to the business. The less investment considers less employment and less growth. It used to redistribute the income and wealth. For an example, the retired people can see the fall of their real value of pension amount. Last but not the least; it can be state that it increases the business risk, where higher risk means limited investment. Unemployment Unemployment is one of the key economic indicators that refer the number of people within an economy, who are able and willing to work, but unable to find a job. On the other hand, people who are not able to or willing to do a job can be considered as economically inactive. High level of unemployment can result a struggling economy, where the supply of labours is surpassing demand from the employers. It also carries important social costs. People, who are unable to find jobs, start to rely on the income benefits. Balance of Payments The current or trade account deficit may be an indication an extended structural economic problem, which are insufficient investment, limited competitiveness in foreign market. An increasing trade deficit may represent potential loss of employment and output as it reflects a net leakage circular flow of spending and income. A large deficit in current or trade account addresses unstable economy. It creates huge market demand contrasted with the scrawny industrial sector. Huge deficit in the trade in products and services symbolizes huge supply of currency in the for-ex market that may result a significant fall in the exchange rate. Effect of Changes The effects of inflation, Unemployment and Balance of payment deficit have been described below with appropriate examples. Inflation The average economic growth is almost 2.5%. The actual rate can fluctuate. According to the below diagram it is feasible that the country has experienced with recession, boom and inflation periods. The graph represents that UK has undergone through the house price inflation from 1982 to 1994. This price rise has created high consumer spending. The boom in house prices has result economic boom in late 1980s (Riley, 70). The drop in price of houses in early 1990s caused the economic recession in UK. Unemployment In the year 2011, the long term net migration in UK was more than 2, 15,000 which is low comparing to 2010. UK has outsourced migrants from China, India and Pakistan. On the other hand 3 leading people emigrating destination from UK was India, US and Australia. The misbalanced ratio has created huge unemployment within UK in post recession era. This huge immigration has impacted the UK economy and the community very badly. Net inflow has increased the rate of aggregate demand. On the other hand due to people immigration, several problems like shortage of housings, limited jobs for the deserved candidates had been raised. Moreover, it has created an economic uncertainty as the economy was not able to balance the demand and supply within the country. Balance of Payment Deficit The following diagram will show the deficit on the goods’ trade account of UK since last two decades. UK is experiencing deficit from the year 1983. During these periods of time the UK economy was either in Boom, or in recession or in inflation phase. An increasing trade deficit has created unemployment in the country (Gillespie, 420). Moreover, it has reduced the total business output. It has provided a net escape and misbalanced circular flow of income and expenditure. A large deficit in trade account notifies unstable community and economy. It has created huge market demand contrasted with the undernourished industrial sector but the business units could not meet with the market demand. Macro-Economic Policies Several micro-economic policies can be implemented in order to reduce the problems like high inflation, unemployment and balance of payments. If the key reason behind the high cost trade deficit is a huge level of aggregate demand then the deficit can be overcome automatically in the recession period. When the inflation rate increases then government have to implement several policies in order to overcome the problem situation. These policies are being recommended to the government as well as the firms in UK. If the business units of an organization effectively keep low prices, then this strategy will pull more number of buyers which may reduce the effect of high inflation rate in the society, economy and business. Moreover, they need to increase their output with increasing cost in order to take the advantage of economies of scale. The power of trade union need to be reduced. Reducing the power of trade unions will overcome the problems like real wage unemployment. The labour market flexibility need to be improved in Europe as the current restrictive labour market may discourage the organization to employing the employees. Government should play more active role in the risk or job loosing benefits. After certain period of time government should guarantee of public sector relating job. This policy will significantly reduce the unemployment. The organizations can be provided subsidies in order to take long term unemployed. It will provide confidence on job training. Expenditure reducing policies like fiscal policy can be implemented in order to reduce the negative impacts of the balance of payments. Expenditure switching policy may overcome the deficit of balance of payments. It will help to control the balance of payment deficit for a long term period in order to reduce the effect of high inflation rate. Import control and implementation of tariff can control that total trade deficit of an economy. Works Cited Gillespie, Andrew. Foundations of Economics. Oxford: Oxford University Press, 2007. Print. Riley, Geoff. Housing Market Economics Digital Textbook. Yorkshire: Tutor2u, 2005. Print. Ruddock, Les. Economics for the Modern Built Environment. London: Taylor & Francis, 2008. Print. Read More