Using Demand Management Policies to Promote Economic Growth in the UK - Essay Example

Using demand management policies to promote economic growth in the United Kingdom The current economic growth, as reflected in the GDP, was at a percentage of 0.5 for the year 2011, as measured in the first four months. However, it was said to have decreased at a slight percentage of 0.2 as compared to the other years. There are some reports citing evidence that the economy will fall drastically in the initial four months of 2012. On another note, this may change to an increase in the coming months. Economic growth can be defined as a measure of a rise in the Growth Domestic Product (GDP). It is for this reason that we determine whether a country is undergoing inflation or growth and the cost of living of a particular country. To better understand the definition, the term GDP should be made clear. The latter gives a sum total of the production of a given country for the year in question. The total sum comes from adding the government, business and citizen’s expenditure and deducting it from all exports of the country (McCombie and Anthony 43). This will give a general idea of how the market is performing against other international trading markets. The current economic level as explained earlier can be attributed to a number of factors. One of them is that the government has been against the policy of owning property by the public and has also declined the expansion of welfare programs for the public. Nevertheless, the country has an enviable service industry with proper and modern facilities in place. These facilities can be traced to the banking sector, insurance and other business entities that have sky-rocketed the economic growth. Ironically, industries are not in the limelight anymore. As for the forecast economic growth, the International Monetary Fund (IMF) has much to say about the future of the United Kingdom. They report that the world is undergoing a recovery phase, but certain factors will inhibit this progression. High risks with no guaranteed returns continue to challenge investors, which can diminish growth; added that the financial aspect and business opportunities are low. Mr. Daniel Tarling-Hunter, an economist explains why the economy may be falling apart (Thompsons 22). The three reasons that he puts forth are linked to an increase in the rates of unemployment, adding that there is increasing inflation in the region leading to people’s distrust in the government. He adds that this may change in the middle months of 2012 due to hosting of the Olympic Games and an overall decrease in inflation. The economic policies of the UK gear towards a decrease in the manufacturing and production industries. This has caused a stir among the renowned economists of the country. The government has been instrumental in providing policies aimed at enhancing even and proper financial growth all over the country. For instance, it has tried to promote business and its prospects in a view to increase employment in the region. There have been four policies instigated to help economic growth. One of them is the fiscal policy targeting the finance sector which has been out of hand since the public is borrowing large sums of money to pay expensive mortgage thus enhancing debt. The monetary policy will aid in ensuring regulation of prices for greater stability in the trade market while the microeconomic policies will target at drawing the country into a better stand in the world economy by looking into issues of taxation system and business system. Increased government spending refers to the act of the government to influence the economic setup of a country by acquiring more goods and services than it had previously allocated in its national budget. There is an overall rise in the total demand of the country during such periods. It is part of the fiscal policy by the government to control spending in the country. It could have a positive or a slowed impact on the country’s economic prospect. When there is less spending by the government, the rate of GDP goes under since it is part of the latter. This will cause deflation in the near future. On the other hand, a reduction in the overall expenditure in the areas of infrastructure, health, research, jobs and other vital sectors in the economy will only lead to a decrease in the economic activity of the country. The Keynesian demand management policies refer to the theory elaborated by John Maynard Keynes, who states that the government should step in during periods of recession so as to influence its economy (Putnam and Nicholas 21). He says that a deflation in the economy is due to a lack of total demand in the country, and it can be corrected by the act of increased government spending. However, when the period has lapsed the government should cut down on its total expenditure to allow for room of economic growth from the public itself. He elaborates that the interference by the government during periods of economic depression when there is low demand, should lead to increased government spending while the opposite is true. This has a direct impact on the aggregate demand. When the aggregate demand is low, (AD1) then a cut on taxes and increased government should be the solution. When the demand is high, (AD4) then increasing taxes and cutting on government spending is the way to go. However, there are arguments that these principles cannot always work. When the government increases its demand for goods and services, it leads to a rise in employment rates due to skilled labor. However, the situation will change in the long run when there is a rise in public prices for those goods and services leading to a demand in less skilled workers in the lowest economic bracket. In the long term the problem of unemployment may occur. The fiscal policy refers to the use of government expenditure to control the trade cycle ion the country. There is a retaliation effect in the total demand of goods and services. The latter can rise when there is higher government spending or when the taxes are reduced. The impact these polices have on the economy can be related to the demand management policies explained earlier. The Neo classically theory is another approach to increasing the economic growth. It was devised by economists in the 18th and 19th century, who state that the government should not be allowed to interfere with prices in the country’s economy since this will lead to vices of corruption, low standards and lower prospective. Instead it should give freedom to its citizens to operate on friendly policies on trade and while relenting control on supply chains. The level of economic growth will thus be witnessed in the increased output that is proposed. Currently the UK government has done some restructuring in the industries by cutting down on production and manufacturing leading to a lesser emphasis on the industries. There are economic policies being formulated by the Monetary Policy Committee, Bank of England to correct inflation in the economy. For example the Bank has dramatically reduced its interest rates as to encourage borrowing and has added the money in circulation by quantitative easing. The government has cut down on taxes so as to encourage spending by the public. It has also provided protection for banks and other loaning institutions involved in the loan sector. The monetary policy refers to the aspect of regulating the sums of money in circulation in the country, the loans available and their cost in an attempt to influence the total demand (Lipsey and Harbury 13). This will involve the pricing of interest rates in the financial institutions available to citizens. It is a feature that solely rests on the Central Bank of a country in coalition with the government. Investment which heavily relies on borrowing for its success can either be encouraged or discouraged by the government’s monetary policy. This is evident when the interest rates are lowered or increased. Demand for loans is heightened when there is more money available and low interest rates leading to low costs of borrowing. On the other hand, high interest rates and low sums of money in circulation leads to higher costs of borrowing that discourage investing. The mechanism defining monetary transmissions refers to the policy that influences the changes in the economy of a country. It is geared towards transforming the interest rates of the bank so as to influence other factors essential in economic growth. These key decisions made by the government change the way business is conducted in the region while affecting the lifestyle choices of its citizens. In time, there will be an impact on the demand, overall output and inflation in businesses and common households. In investment, financiers will have to make careful considerations when planning to inject capital funding in business. A decrease in interest rates will boost their enterprise by an increase in more permanent investment causing a downward marginal efficiency of investment schedule. The supply side policies are moves by the government to dictate the private sector’s output in the economy in terms of how much and when. They usually cause an increase in the supply chains of most markets. For example, when there is a reduction in taxation of individuals, they are encouraged to work more to increase their income. This will lead to an increase in employment rates of a country. When looking at the research and innovation industry, a deduction in tax here causes greater renovations in industry leading to improvements in service delivered in that sector (Filc and Kohler 29). This directly affects the growth or decline of an economy by the changes taken into account. The Keynesian and monetary policies both differ in three major assumptions. For example, Keynesians are against the control by the Central Bank on monetary issues while the Monetarists are for the idea of ultimate rule on the money policies. On the fiscal policy, Keynesians regard it with utmost importance while the Monetarists disregard it. On another note, the Keynesians argue that the aggregate supply curve is a horizontal straight line in the short term to enable greater impacts on output and employment in the future. Monetarists state that the aforementioned curve to be a vertical line as the economy is usually not stable hence its stability is not considered. Both principles have their advantages and disadvantages in the areas of rate of economic growth and nature of trade markets. The Monetarists believe in freedom of the market which could be a disadvantage in the case of a recession while the Keynesian’s approach of government interference could lead to stabilization of an economy when in recession. Quantitative Easing is a move by the government to increase the money available in the economy by literally injecting funds into financial institutions so as to increase capital. This is done by taking over government securities in the market. It is a way of encouraging lending and liquidity for the people. This is usually done when the strategy of lowering interest rates in view of encouraging borrowing has failed. However, even though more money will be at hand in the public, the quantity of goods still remains the same hence there will be the problem of inflation. In conclusion I think the UK government should use both policies and demand management and monetary control so as to contain the situation at hand .For example, in the case of unemployment, they should first intervene by increasing government spending but reduce this expenditure when conditions are better. They should also relax their investment policies so as to allow for more market trade by the public and foreigners. As for the money factor, the Bank of England should lower interest rates to allow for more loans. Works Cited Filc, Wolfgang, and Ko?hler C. Macroeconomic Causes of Unemployment: Diagnosis and Policy Recommendations. Berlin: Duncker & Humblot, 1999. Print. Lipsey, Richard G, and Harbury C. First Principles of Economics. Oxford: Oxford University Press, 1994. Print. McCombie, John S. L, and Anthony P. Economic Growth and the Balance-of-Payments Constraint. Basingstoke, Macmillan, 1994. Print. Putnam, Robert D, and Nicholas B. Hanging Together: The Seven-Power Summits. Cambridge, Mass: Harvard University Press, 1984. Print. Thompsons, Reuters. "This budget will heighten income inequality." The Great Debate UK. N.p., 12 Apr. 2012. Web. 4 Apr. 2012. . Read More