Economic Growth of the UK and Germany - Essay Example

?Business Economics 513078) Economic Growth of UK and Germany- A comparison The last global financial crisis has impacted the economic growth of most of the major players in the market which include US, UK, Germany and France. Of these countries it was said that UK was the last to enter into recession and was therefore it took a lot greater time to come out of. Though some of the reasons could be attributed to the changing global scenario some of the domestic policies followed by the government also had its share in contributing to its delay. (BIS Economic Paper No.9, 2010) Economic Growth comparisons between two major countries are usually carried out by comparing various indicators that suggest higher performance. Primarily among these tool is the GDP. It refers to the net market value of the goods and services provided by a country. It can also be used to assess the standard of living of citizens in that country and can be used to gauge the demand and the buying capacity of individuals during that financial year. The Gross Domestic Product (GDP) of the UK shrunk 0.60% during the latter half of the financial year in 2010. It has been calculated that United Kingdom’s average quarterly growth rate was 0.59% which climbed the charts steadily to 5.30% and also witnessed a record low of -2.5%. (United Kingdom GDP Growth Rate, 2011) The UK as a robust economy has its GDP usually boosted by the strong performance of the banking and insurance services. The manufacturing industry meanwhile faced a recession and the key to overcoming this problem lies in more government involvement while at the same time continuing its social welfare initiatives. One of the most current statistics that have been obtained indicated the following Country Interest Rate Growth Rate Inflation Rate Jobless rate Government Budget Exchange Rate UK 0.50% -0.60% 4.00% 8.00% -11.40% 1.62 (United Kingdom GDP Growth Rate, 2011) However when compared to 2009 there has however been a slight improvement of 1.5% GDP in the last quarter of 2010. The manufacturing experienced a slight boost in the latter half of 2010 climbing by 1.1% and the utility production also grew by 4.6%. The mining sector experienced a slight meltdown falling by 4.5%. The construction industry was also severely hit as several major construction projects were put on hold due the banking crisis that arose in 2009-2010. It fell by 2.5 %. Other sectors that experienced a drop were the business services and the transport sector at 1.1% and 1.4% respectively. (United Kingdom GDP Growth Rate, 2011) The German economy on the other hand fared better compared to its counterpart. The GDP increased by 0.40% in the latter half of 2010 compared to 2009. It also had its share of ups and downs with its average GDP growth at 0.29%. This reached a peak of 2.30% in June 2010 and a nadir of 3.50% in March 2009. (Germany GDP Growth Rate, 2011) Export forms the backbone of German economy and accounts for almost one third of its income. Germany has performed better than UK during this taxing period as shown by the market indicators and its strong commitment in engaging to closer European cooperation between member countries in both economic and commercial policies is reaping benefits. Country Interest Rate Growth Rate Inflation Rate Jobless rate Government Budget Exchange Rate UK 1.00% 0.40% 2.00% 7.40% -3.00% 1.42 (Germany GDP Growth Rate, 2011) Comparing both the Macroeconomic performance of UK with its European counterparts over the past ten years, one finds that its performance of attaining an annual GDP growth of 2.3% places it third behind US and Canada. However rising levels of both private sector debt and public sector debt have held back the government in providing sufficient fiscal stimulus to the manufacturing and industrial sector. Trade, an area where Germany has made rapid progress also has declined in the context of the UK market. (BIS Economic Paper No.9, 2010) Business investment has also taken a backseat in UK. Post 2000, survey estimates indicate that UK is ranked behind US, France, Canada, Germany and Japan as far as business investment was concerned. Business investment in these countries accounted for one third of the GDP growth. However the economy has started picking up with a lot more concerted governmental action. (Davies Howard, 2010) Oligopoly- Car market in the European Union. Oligopoly is defined as a market condition in which the number of players in a market is limited. There are several reasons that create this condition. (Philip Hardwick, 2004) (i) One of the reasons attributed to this several government restrictions which inhibit the entry of a foreign player into the market thus enabling a stable demand from the local market. (ii) Limit pricing is another technique that is adopted by the existing players by which the price of the product is kept at levels that are unmanageable to attain by foreign players. (Verboven Frank, 1996) (iii) The existing car manufacturing companies have generated a large presence through years of persistence and therefore are more visible in the market. The network and reach of these companies would be on a higher footing when compared to new entrants who would need large amount of advertising to make their presence felt. This indirectly affects the unit cost of the vehicle. (iv) The existing car companies have large number of variants catering to different classes and groups of people. New players find it difficult to launch multiple brands due to the large capital involved and the risk involved in such an exercise. (v) Since oligopolies like the car market can expand both vertically and horizontally, forward and backward they can act as predators to drive out competition by engaging in pricing that may be difficult for the new player to compete with. (Verboven Frank, 1996) (vi) These brands also engage in non-price competition by which customers are encouraged to change their existing car with another variant of the same company after paying a small percentage extra. This ensures that customers do not go out looking for new varieties of car brands. (vii) With their huge infrastructure these companies engage in creating a brand image that is very difficult for a new entrant to achieve. Since the product in itself is one which has a high initial investment apart from the daily expenses in fuel, customers are wary of selecting new brands that may prove ineffective in the long run. (viii) Research and Development into creating new brands that are in sync with the ethos of the local population and also is in line with the environmental and road conditions of that particular region also go a long way in the way customers choose their brands. However this kind of marketing tends to reduce options for the customer as he has fewer variants. In such cases the limited number of companies in the market may also collude with each other in fixing the price of the vehicle. The Kinded Demand Curve Source: AQA, 2004 The Kinded Demand Curve gives us an idea as to why the car market in the European Union is an Oligopoly rather than perfect competition. The figure shows an oligopolist selling OB quantity of cars at a market price of OA. It is at this point of the curve that the curves experiences a sharp turn and is said to be ‘kinked’. As per this theory if car manufacturer were to increase its price above OA, it would not be able to sustain the same volume of sales in the market since the pricing of its competitors would be comparatively cheaper and the car would inevitably face a drop in sales. (Philip Hardwick, 2004) Again if the manufacturer were to reduce the price of the car blow OA, the revenue generated from one unit would fall. Hence it would have to sell more number of cars to maintain the same or achieve a higher profit. But in reality, this would lead the competitor to reduce its price to stay in the race. Such an event leads to an all out price war which would ultimately lead the company into making losses. (Philip Hardwick, 2004) The car market in the European Union being an oligopolistic market can also be defined by the average cost curve. (BBC, 2007) This theory states that there is a certain level of production at which cost of production is at a minimum and therefore the pricing of the vehicle would be optimum. Hence it is a win-win situation for both the manufacturer and the customer. Any increase or decrease in production above or below this volume would lead to an increase in cost of production affecting market pricing. Converting this into a market of perfect competition would lead to the company restructuring its pricing policy which would inevitably generate a production volume below its optimal output. (BBC, 2007) This would therefore reflect on the cost of the vehicle thus creating a kind of market instability. Although an oligopolistic market provides fewer options to the customer it is essential and in a way beneficial that the market stays an oligopolistic one rather than a one having perfect competition. Reference Lists 1. BBC (2007) European Union market, Available at http://news.bbc.co.uk, [Accessed on 20th March 2011] 2. BIS Economic Paper No.9, 2010, Economic Growth, Department for Business Innovation & Skills. 3. Davies Howard, 2010, Back From the Brink: where next for the UK in the Global Economy?, LSE 4. Germany GDP Growth Rate, 2011, Trading Economics, Available at http://www.tradingeconomics.com, [Accessed on 22nd March 2011] 5. United Kingdom GDP Growth Rate, 2011, Trading Economics, Available at http://www.tradingeconomics.com, [Accessed on 22nd March 2011] 6. Verboven Frank, 1996, International price discrimination in the European car market, RAND Journal of Economics Vol 27 7. Philip Hardwick, 2004, Oligopoly, Introduction to Modern Economics Read More

 

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