The Total Output of Employment and Income Level - Essay Example

Economic fluctuations present problems to a country that are returning repeatedly as the level of economic activities rises and falls. The total output (GDP), employment and income level may be affected when there is a sudden change in the level of economic activities in the country. For economists, these fluctuations in output and employment are parts of the phases of the business cycle. And as the term cycle suggests, these fluctuations are normal and predictable. But recessions, as a phase of the business cycle, are as irregular as they are common. It is said to be integral in a free-trade economy.

The United Kingdom recession of 1981 was a result of the monetary strength which in turn affected manufacturing and by the government’s policy to reduce its past inflation of 27%; they enforced a stringent monetary policy by impeding their borrowing. Taxes were increased and the consumer’s purchasing power was diminished resulting in a downfall in spending.  After a decade, in 1991 a ‘boom and bust’ of the UK economy ensued. Growth was seen at rapid growth that became unsustainable that inflation rose to 10%. Again, the government set in and imposed interest rates to halt the people’s spending. These interests had a domino effect as they affected mortgages consequential to foreclosure of housing loans or sell thereof  (EconomicsHelp, n.p.).

            A recession is a phase of the business cycle usually following a peak. It is a period characterized by a decline in the total output, income, employment and trade. This economic downturn is also marked by the widespread contraction of business activity in many sectors of the economy. But because many prices are downwardly inflexible, the general price level is more likely to fall only if the recession is severe and prolonged. If an economy fails to recover from a recession, then depression occurs (McConnell and Brue, 134). The economy of the United Kingdom is no exception for these economic recessions as they already experienced and recovered from recessions several times.

            What is apparent in today’s economy is that it has a global characteristic that has a worldwide effect among interdependent countries. Many believe that a plummet in Real GDP will ultimately affect employment. In the Great Depression of the 1930s which included the UK, the famous economist Keynes debunked this concept and contended that negative output over a period will not necessarily clear out on its own as was regarded by the notion of the self-correcting aspect of a free economy. He cited that there are four reasons for this; first, “Firms should cut wages to reflect lower prices but in reality, workers are very resistant to cuts in nominal wages,” second, “2.         If wages were cut in response to unemployed workers would have less spending power, therefore, AD would continue to fall,” and third,   “In a recession, people have low confidence and therefore spend less. Keynes said this was the “Paradox of Thrift” (EconomicsHelp, n.p.).       

            In typical years, gross investment or all the country’s investment goods - both that replace machinery, equipment, and buildings that were used up or worn out or just made obsolete in producing the current year’s output and any net additions to the economy’s stock of capital exceeds depreciation or the amount used up over the course of a year (McConnell and Brue, 116). During these years, the net investment is positive and there will a recorded rise in the nation’s stock of capital. However, if the gross investment is less than depreciation, the net investment will be negative. This means that the economy is disinvesting because it is using up more capital than it is producing. When this happens, the nation’s stock of capital will shrink. When capital shrinks, the economic activities will also decline or slow down. This is what happened in the Great Depression of the 1930s and its effects were felt by all countries across the world.

            Banks play important role in an economy. They act as intermediaries between the producing and the consuming units. Banks take in leakages in form of savings and give injections in form of investments. They take consumers’ savings as deposits and give interests in return. Business firms borrow capital for their investments from the banks and later on pay with interest. The Bank of England in this most recent recession has experienced inflation and deflation which obstructs the recovery of the economy. The pound continues to be weakened due to VAT and staggering oil prices. Wage is up by a mere 1% in 2009 and spending power continues to fall as the market for export continues to fall. “Inflation is here, and cutting into spending, while deflationary forces are under the surface. There is a real risk that UK prices do head back down – but with the economy” (Campbell, par. 7).