The Economic Performance of United Kingdom - Essay Example

? Economic activities can measure the performance of the economy. These activities are measured by the use of economic statistics that are gathered and collected through surveys and studies. Economic statistics regarding the Gross Domestic Product (GDP), unemployment and inflation of a country are computed and interpreted by the economists to assess the health of the economy and often used by the policy makers to monitor economic developments and formulate appropriate policies that will safeguard and improve the economy’s health (McConnell and Brue 2005, p.112). GDP is often considered the best measure of how well the economy is performing (Mankiw 1997, p.17). It measures the flow of money in an economy as it attempts to summarize in a single number the money value of the economic activities performed by the households like their earnings and their consumptions and by firms like their earnings and the prices they are charging. This is translated in the macro level as the economy’s total income and total expenditure. GDP measures both the income of the people in the economy and expenditure in the form of consumption, investment, government purchases and net exports. We can assess the economic performance of United Kingdom (UK) using the economic indicators mentioned above. We begin with analysis of the trend in UK’s GDP. There were rises and falls in UK’s GDP as results of the economic fluctuations over the years but the latest figures in its trends reveal the positive position of UK. The UK figures show that GDP on a comparable basis (constant basic prices) grew by 0.5 per cent in the year to end-September 2010 and grew by 0.7 per cent in the third quarter of 2010 (www.scotland.gov.uk 2011). These figures are the results of the experienced increase in both services and construction sectors, 0.6 % and 1.6% respectively and the fall in production sector by 0.4 %. This trend was presented in Figure 1. FIGURE 1. UK GDP GROWTH RATE (2000-2010) In this graph, UK’s GDP was positive from year 2000 up to the first quarter of 2008 and started to register negative growth rates in the second quarter of 2008. There was a negative GDP gap as the actual GDP was less than the potential output. This was the same year when the global recession hits most countries around the world. Recession is one of the economic fluctuations that economies have to face and pass through because failure to do so will cause economic depression. It is a period of declining real GDP, accompanied by lower real income and higher unemployment. UK is one of the affected economies by the recent global crisis. The effects were seen and felt by everyone in the economy. The findings of a survey of almost 5,000 small, medium and large businesses suggested that UK faced a serious risk of recession within months (BBC 2008). Major businesses reported fall in their production and sales. Firms particularly in the manufacturing and services sector have experienced serious cash-flow problems as results of the lowest levels of sales and orders, job expectations and confidence hit. Both consumers and firms were losing confidence in the recovery of the economy. This made them to hold on tight to their money and refrain from spending, making the consumption and investment level very low. We all know from our circular flow of economic activities that expenditures on buyers purchases and consumption will be the income of sellers of products and providers of services. The effects of the changes in consumption behavior of the households were extended to the producers. House builders has to cut their jobs and reported that completion of their house sales fell. The services firms like restaurants, gyms and tour operators were also hard hit by the decrease in consumption level of the households. The low volumes of production and sales of the businesses caused the real income to fall and contributed to higher inflation rate (Friedman and Schwartz 1982, p.253). More firms have decided stop their production activities because the present condition won’t allow them to operate on normal operation. As a result, more workers have to work lesser working hours if not totally lost their jobs. The decreased incomes received by the workers made their purchasing power lower. However, if the firms will continue their operations without cutting their production costs, they have to increase their selling prices for them to make profits. This resulted to rising prices,a sign of inflation caused by the increase in costs of production. High inflation rates hurt both the households and the business firms. Because of inflation, the purchasing power of the consumers are decreased making their incomes worth lesser than before.So, they cut their spendings and saved for their future consumption which caused the present level of consumption fall. Businesses were also reluctant about their investments for new equipment or new machineries because they are uncertain about the profits that their investments will make. And this was reflected in the gross investment of UK’s economy because in the data gathered by the World Bank in 2001, United Kingdom had the lowest gross investment as a percentage of GDP among selected nations (McConnell and Brue 2005, p.163). Table 1 provides the list of the selected nations and their corresponding gross investment as a percentage of their GDP. TABLE 1. GROSS INVESTMENT EXPENDITURES AS A PERCENTAGE OF GDP, SELECTED NATIONS Source: World Bank, www.worldbank.com The effects of the recession were also evident in the trend of unemployment in UK. And just like the growth rate, it experienced ups and downs over the years but the lowest decline happened during and after the recessions. During recessions, unemployment is caused by the low output, income, employment and trade. This unemployment results from the decline in total spending or decrease in demand of goods and services. It is also known as the cyclical unemployment (McConnell and Brue 2005, p. 137). This is a serious problem when it happens but just like with the other effects of recession, there are possible solutions available. Recession is just a phase of the business cycle that every economy has to encounter. Its duration and intensity varies on the level of economic activities the country has. However, if not properly addressed, a prolonged recession may lead to economic depression. The UK government has done actions to solve each problem brought by the recession. To address the rising interest rate and high inflation rate, monetary policy was implemented. As of Q1 2009, the Bank of England has already cut interest rate to a historic low of 1.0 per cent, with the consensus believing this will drop to 0.5 per cent (www.economywatch.com). Cutting the rate of interest may encourage the investors to engage in businesses. This will help the economy recover because of the added capital in the flow. New businesses also mean job opportunities and will generate employment in the economy. News have it that UK unexpectedly rose last month, official figures reveal today, underlining the challenge facing the government in restoring the feel good factor to voters battered by rocketing inflation and public service cutbacks (Stewart 2011). In terms of the latest fiscal policy, the UK government adopted the Golden Rule. During Gordon Brown’s stint as Chancellor, the Labour Party officially adopted the ‘Golden Rule’ of fiscal policy (www.economywatch.com). The Golden Rule has something to do with the savings,investment and consumption. Because saving equals capital, whatever the present generation saves now will be the capital of the future generation. So, little savings now will mean little capital in the future. The government has to increase its capital to be available for the future through borrowings and investing it. And to meet the expenses at present, the revenues from taxes should be used. So the implementation and collection of taxes should be strictly observed. The government also seek to follow the Sustainable Investment Rule and this could be done by keeping the level of national debt at 40 per cent of GDP (www.economywatch.com). However, figures show that the government failed with this as the public debt already reached 42 per cent by the end of 2008 and is expected to rise up to 70 per cent by 2010. Steps and solutions were done to address the economic problems caused by the recession but still fails at some points. It is high time that the UK government needs to take all possible actions to help reduce the uncertainty and bring the stability and growth to its economy. There are still suggestions for other solutions to the problem. One of these is for the government to print more money. Governments can earn revenues from printing money that can be used to finance the stimulus package offered to the claimants during and after the recession. These new money to be injected to the economy can also help the financial institutions increase their money balances to carry out their operations. Savings can be increased if consumption level will be decreased because what we save is what we don’t actually spend. So, the consumption level should be minimized. The government has to think of structural changes that will encourage savings and discourage consumption. Just like United States, UK needs to cut the rate in increases in government spending and debt while fostering incentives for growth and increases in productivity, innovation and opportunity (Zoellick 2011, p. 52). Bibliography BBC. Recession 'looming' for UK firms . 8 July 2008. 8 March 2011 . Friedman, Milton and Anna Schwartz. Monetary Trends in the United States and the United Kingdom: Their Relatioship to Income, Prices and Interest Rates,1867-1975. Chicago: University of Chicago Press, 1982. Mankiw, N. Gregory. Macroeconomics. New York: Worth Publishers, 1997. McConnell, Campbell and Stanley Brue. Macroeconomics: Principles, Problems and Policies. New York: McGraw-Hill Companies, Inc. , 2005. Stewart, Heather. guardian.co.uk. 16 February 2011. 8 March 2011 . TradingEconomics.com. United Kingdom GDP Growth Rate. 2011. 5 March 2011 . —. www.tradingeconomics.com. 22 December 2010. 13 January 2011 . www.economywatch.com. UK Economy: The Bank of England, UK Monetary and Fiscal Policy. n.d. 8 March 2011 . www.scotland.gov.uk. Gross Domestic Product- Latest GDP Trends. 19 January 2011. 8 March 2011 . Zoellick, Robert. "Multiple Reserve Currencies." Newsweek (2011): 52. Read More