Macro Economic Policies used by the British Government and the Bank of England - Assignment Example

Total Words: 1962 a) How successful has the government and the Bank of England been in running the British economy over the last three years? The economy of the United Kingdom has seen a constant growth of almost sixty three consecutive quarters, and it is now on the fence of going into recession. The economy has been seeing almost two decades of increasing employment, disposable income and house prices however in June 2008 the economy has seen a halt in all these factors. The economy of United Kingdom has seen the slowest growth during the past three years and a few analysts are of the view that the interest rates will fall very soon. The reports from the office for national statistics have reported the gross domestic product rose by 0.2 percent in the quarter ending June 30th, which brought down the annual GDP rate to 1.6 percent from 2.3 percent in the first quarter this year (Duncan, 2008). United Kingdom is one of the most developed countries in the world and has made a mark for itself throughout the world. United Kingdom comprises of England, Wales, Scotland and Ireland. The capital of England London is rated as the world’s most expensive city. According to Professor Bean’s (Bank of England chief) bleak assessment, the United Kingdom has seen an undisturbed and unbroken expansion for over sixteen years and as mentioned earlier the country is starting to face recession. Almost every country has been facing an economic slowdown since the market crash in 1970s however there have been strong efforts from almost every economy to ensure the economies get back into stable positions. United Kingdoms has held the fifth position in the global economies however the risk of the recession since the 1990s is now growing for the country and the living costs are also growing along with this. This has made it difficult for the Bank of England to cut down the interest rates and is causing a lot of issues with the Labour governments’ handling the economy as the public is extremely dissatisfied with the growing interest rates (Reuters, 2008). It has been noted by economist James Knightley at ING that the growing credit crunch and the rising food and energy prices is disrupting the growth of the country and there is no solution to this by the fiscal and monetary policies. This slowdown was triggered by the biggest drop in the construction sector during 2005. This resulted in a drop in the decline in the building industry which converted the decade long housing boom into slums. The government however did its bit by contributing to the infrastructure projects which helped the industry stabilise and get back into action. The service sector contributes to almost 74 percent of the economy is slowing and falling. The construction sector makes up a total of only 6% of the entire GDP of the economy. The Bank of England and the British Chamber of Commerce have forecasted that the economy is facing a very difficult time and the economy is expected to get very rough. The forecasts have been that the employment levels are expected to fall however the recession will not be as bad as the 1990s but the impact of this recession will be felt by the country (BBC, 2008). The last three years has seen a little improvement however this has all been covered by the recession that has started off. The Gross Domestic Product of the country has seen a slight growth in 2006 however that has now reduced. According to the national Statistics the GDP growth during the second quarter was 0.0 however the GDP growth has increased to 1.5% higher than the second quarter of 2007. The production industries saw a fall in output of 0.7% when compared to the pervious quarter of 0.4%. This fall was due to the drastic fall os almost 0.9% in the manufacturing industry, 0.1% in the engery sector and almost 0.1% in the electricity, gas and water. Also it is to be noted that the service industry has not seen any growth in the second quarter and remained at 0.2% and a weak growth was seen in most of the main service categories apart from communication, transport and storage. There has been a rise and fall in almost every sector of the market and it is also to be noted that the GDP deflator has risen by 2.8 % when compared to the second quarter. The construction sector saw a fall of 0.5% when compared to the increase of 1.1% in the previous quarter. The expenditures for house hold expenses also saw a fall of almost 0.1% and the consumption of household goods had reduced quite a bit (National Statistics, 2008). The Government consumption expenditure however rose by 0.5% and was at 2.1% higher than the second quarter of 2007. The trade deficits in real terms saw a low of almost £9.8 billion in the second quarter on 2008, from £10.3 billion in the first quarter. The GDP expenditure deflator however saw a rise of almost 2.8% when compared to the second quarter of 2007. The total gross operating surplus saw a fall of 1.0% and now stands at 8.2% higher than the second quarter of 2007(National Statistics, 2008). This reduced GDP over the period shows that the output of the country is reducing over the period and it emphasises on the recession the country has started facing. From all the information above it is clear that the due to the lack of the government being stringent and participating very effectively for the economy the country has seen a fall in the economy. The government along with the help of Bank of England has worked towards making the country’s economy better however the recession is now something that cannot be dodged since the country has only seen a continuous growth for 16 whole years (Gummer, 2008). b) Describe and evaluate the main macro economic policies used by the British government and the Bank of England over the last three years. Macroeconomics of a country refers to the study of the economic behaviour of a country. The economic conditions of a country are generally forecasted by economists, these forecasts are generally beneficial for consumers, firms and government to help them make better and more informed decisions. Macro economic analysis generally focuses on three main things: Gross Domestic product, Unemployment, and Inflation. The first set of macroeconomic goals was set in the White Papers in 1944. These goals have been accepted over the years and even now these goals form the basis for the goals of the economic studies however the priorities have changed over time. The main goals were divided into four main heads: Stable Prices, Unemployment, balanced external accounts, and economic growth (Gore & Murray, 1991). While trying to understand the economic conditions of the country, it is essential to discuss these goals. Further these topics will be discussed to help the readers understand the economics of the country better. Firstly, stable prices which forms an important goal of the country’s economics. Stable prices refer to the consistency of the average price of goods and services over time. It is essential that the average prices of goods and services remain constant as it would affect the buying power of the public and an increase in the prices would mean the public would need to pay more for buying the normal basic consumer goods (FX Words, 2008). The rate of inflation is calculated using the CPI (Consumer Price Index) of the country. The higher the CPI the higher is the inflation which means that the buying power of the citizens is reduced. This is not a very good change for the economic conditions of the country. As per the National Statistics of the country the CPI of the country has touched a very high of 5.2 percent which is the highest since 2005. The increased CPI is not helping the country in any aspect and is making the prices of the regular daily consumption goods higher. A study showed that the prices for the daily consumer goods have increased. For example the price of Chicken has moved from £1.98 in 2007 to £3.50 in 2008, bread has moved from 48p to 67p, etc. This kind of increase would not be very helpful for the consumers and would prove to be very costly for the pockets of the general public (Duncan, 2008). The second important goal of the country is unemployment. This is a very important aspect and is given a lot of importance. The correct utilisation of the resources available in the country is very important. Unemployment of the working age groups of the country only means that the country is not utilizing the resources well and is capable of better results, however over utilisation also affects the country in a negative manner, it would reduce the productivity of the resources and thereby reduce the GDP of the country. The government has aimed to provide at least 80% of the working age population with jobs. There has been a fall in the number of people in employment as well as the employment rate over the year. There has been a sharp decline in the number of vacancies and the number of people losing jobs has increased. The government had managed to ensure 74.4% of the working age population were employed however this has now reduced by 0.4%, leaving the working hours still at a high of 944.2 million (National Statistics – Unemployment, 2008). The third economic goal of the country is balanced external accounts. This is a very important aspect as it records the country’s transactions with other countries. The United Kingdoms however has had a current account which has always run in deficit from 1985 until 2005. It is to be noted that the countries deficits in 2005 was at a high of £32billion which was the largest deficit in nominal terms (Lipsey & Chrystal, 2007). The deficits has been growing continiously over time and in 2007 the deficit was close to 6.5% of the GDP. This is not a very good sign for the economic condition of the country. Last but not the least economic growth also plays a very important position in the economics of a country. A country is said to have an economic growth if the productive capacity of the country is growing. This would enable the country to produce more goods and services thereby increasing the earnings of the country. Higher economic growth is more beneficial as it helps the country improve the living standards. According to the national Statistics the economy growth for the United Kingdom has been 3.1% in 2007. This has been the best over three years and the main causes for the growth in the economy apart from the technology have been lower savings ratio, mortgage equity withdrawal, and current account deficit (Economics Help, 2008). The main factors that affect the economic growth of a country are the growth of quality and number of working population, better capital stock, technology and lastly more natural resources. These factors help the country in a number of ways to improve the productivity and hence have an improved economic growth. For the United Kingdom there has been a sudden economic crunch which has slowed down the economic growth. The graph below gives a clear picture of the economic growth of the country from 2003 until Q3 2008. Graph: GDP and Economic Growth (Finance Blog, 2008) The above graph clearly shows the drop in the economic development of the country in Q3 after a zero level in Q2 of 2008. This sign signals the onset of recession within the country and shows a break in the undisrupted growth for the last 16 years. References BBC, 2008, ‘Recession in United Kingdom is months away’, 18 August 2008, Accessed on 30 October 2008, Retrieved from http://news.bbc.co.uk/2/hi/business/7566792.stm Economics Help, 2008, ‘Causes for Economic Growth in United Kingdom’, 26 October 2008, Accessed on 30 October 2008, Retrieved from http://www.economicshelp.org/blog/economics/causes-of-economic-growth-in-uk/ Finance Blog, 2008, ‘Snapshot of UK Economy’, 13 June 2008, Accessed on 30 October 2008, Retrieved from http://www.mortgageguideuk.co.uk/blog/economics/snapshot-of-uk-economy/ FX Words, 2008, ‘Consumer Price Index – CPI - United Kingdom’, Accessed on 30 October 2008, Retrieved from http://www.fxwords.com/c/consumer-price-index-cpi-uk.html Duncan, G., 2008, ‘Recession: boom years are over as economy slows to halt’, 23 August 2008, Accessed on 30 October 2008, Retrieved from http://business.timesonline.co.uk/tol/business/economics/article4592947.ece Gummer, J., 2008, ‘A firm government will get the economy back on track’, Estates Gazette; 7/19/2008 Issue 828, p43-43, 1p, London Gore, C., and Murray, K., ‘Macroeconomic Policy Objectives’, ACCA Students Newsletter, April 1991, pg 8- pg11 Lipsey, R. G, & Chrystal, K.A., 2007, ‘Economics’, 11th edition, Oxford University Press, New York National Statistics, 2008, ‘GDP Growth: Economic Growth was 0.0% in Q2 2008’, 30 October 2008, Accessed on 14 October 2008, Retrieved from http://www.statistics.gov.uk/cci/nugget.asp?id=192 National Statistics – Unemployment, 2008, ‘Unemployment rises to 5.7%’, 15 October 2008, Accessed on 30 October 2008, Retrieved from http://www.statistics.gov.uk/cci/nugget.asp?ID=12 Reuters, 2008, ‘British economy grows at weakest pace in three years’, 25 July 2008, Accessed on 30 October 2008, Retrieved from http://www.iht.com/articles/2008/07/25/business/ukecon.php Read More