A description of the UK economy - Essay Example

A of the UK economy UK economic performance The UK has the 6th largest national economy worldwide and 3rd largest inEurope measured by GDP. Measured by PPT (purchasing power parity), it is the 8th largest in the world and 2nd largest in Europe. Its per capita GDP in nominal terms is the 22nd largest worldwide. Remarkably, the UK was ranked the 6th largest importer and 10th largest global exporter in 2012 (Giudice, Kuenzel, & Springbett, 2012; pg. 17). Its inward direct foreign investment is remarkably high and the economy has been attracting investors from various parts of the world. The European economic journal states that the UK is one of the most globalized economies. The UK has made considerably improvements since 2003. It is ranked as one of the economies where inflation, unemployment and inflation rates are significantly low even in the contemporary world where most economies are experiencing a crisis due to rapid population growth and the in-expandable capability of their economies (Summers, 2012; pg. 28). Remarkably, its unemployment rate as at 2013 was at 8.0%, inflation measured in CPI (consumer price index) was at 2.8% and the GDP was $2.3 trillion implying an annual growth of 0.2% and a $36,941 increase in per capita despite its huge population of 63.2 million (Economist & Tennent, 2014; pg. 17). The living standards of the people have improved, poverty reduced, and inequality in terms of economic prowess have significantly reduced. Importantly, the economy is ranked among the biggest economies that guarantee a large degree of freedom. Major improvements that have been witnessed in the economy since 2003 and an increase in government spending, monetary freedom, investment freedom, trade freedom, fiscal freedom, freedom from corruption, and labor freedom. In 2006, in particular, the economy reached its highest economic freedom ever (Giudice, Kuenzel, & Springbett, 2012; pg. 29). Regulatory efficiency and management of public finance offset the overall gains. Since that year, the economy has been on a trail of diminishing economic autonomy. The government debt is over 92% of the size of the economy and economic fundamentals have been debilitated. However, comparing the UK’s economy with another world economy such as the U.S’s, one realizes that the two economies are close together despite the fact that the U.S was established a long time ago and the UK economy is striving to reach and outdo that of the U.S. (Financial Times Business Ltd, 2008; pg. 72). The service sector dominates the economy by contributing 78% of GDP, production sector contributes 15.2%, construction sector 6.3%, and the agricultural sector contributes a measly 0.7% (Financial Times Business Ltd, 2008; pg. 74). The economy is maintains an important role in the world despite that it is still recovering from the economic crisis of 2008. Remarkably, during the crisis, the UK experienced the deepest economic depression than all the G7s. Considering its current rapid growth, economists speculate that the economy will be the fifth largest economy in the world by 2016. Below is a summary of major economic statistic of UK economy in 2012 (IMF, 2013; pg. 93). While most world economies have lost their market share in developing economies, the UK’s economic prowess has enabled it to continue maintaining its share. Although its export market declined from 9% in 2003 to 7.6% in 2013, the economy can still be considered to be performing excellently since the other industrialized economies experienced greater declines than the UK within that period. Remarkably, the economic depression of 2008 affected the UK economy significantly and the highest level of inflation was recorded during that period (Agency, 2013; pg. 176). However, it declined after the crisis and has always been within the acceptable limits as indicated below. Year jan feb mar apr may jun jul aug sep oct nov dec ann 2013 2.7% 2.8% 2.8% 2.4% 2.7% 2.9% 2.8% 2.7% 2.7% 2.2% 2.1% 2% 2.5% 2012 3.6% 3.4% 3.5% 3% 2.8% 2.4% 2.6% 2.5% 2.2% 2.6% 2.6% 2.7% 2.8% 2011 4% 4.3% 4.1% 4.5% 4.5% 4.2% 4.5% 4.5% 5.2% 5% 4.8% 4.2% 4.5% 2010 3.4% 3% 3.4% 3.7% 3.3% 3.2% 3.1% 3.1% 3% 3.1% 3.2% 3.7% 3.3% 2009 3% 3.1% 2.9% 2.3% 2.2% 1.8% 1.7% 1.5% 1.1% 1.5% 1.9% 2.8% 2.2% 2008 2.2% 2.5% 2.4% 3% 3.3% 3.8% 4.4% 4.8% 5.2% 4.5% 4.1% 3.1% 3.6% 2007 2.7% 2.8% 3.1% 2.8% 2.5% 2.4% 1.9% 1.7% 1.7% 2% 2.1% 2.1% 2.3% 2006 1.9% 2.1% 1.8% 2% 2.2% 2.5% 2.4% 2.5% 2.4% 2.5% 2.7% 3% 2.3% 2005 1.6% 1.6% 2% 1.9% 1.9% 1.9% 2.4% 2.3% 2.4% 2.3% 2.1% 1.9% 2% 2004 1.4% 1.3% 1.1% 1.1% 1.4% 1.7% 1.3% 1.3% 1.1% 1.2% 1.4% 1.6% 1.3% 2003 1.3% 1.1% 1.1%1.0% 1.4% 1.6% 1.4%1.2%1.1% 1.4%1.3% 1.5% 1.2% The inflation levels reduced due to the fall in prices of fuel, furniture, and clothing. The reduction of inflation and unemployment levels in the UK, economic growth (GDP) increment can largely be attributed to the government’s use of expansionary fiscal policies. Expansionary fiscal policy used by the UK. These are policies used by the government in an attempt to increase aggregate demand and lead to a higher economic growth. Theoretically, aggregated demand (AD) = C+I+G+X-M. Altering any of the factors in the (C+I+G+X-M) category will affect aggregate demand either positively or negatively depending on the type of change (Summers, 2012; pg. 66). The UK government decided to increase its spending (G) since 2003 in an effort to increase the aggregate demand. Its spending between 2003 and 2013 is illustrated below (Giudice, Kuenzel, & Springbett, 2012; pg. 83): Its spending levels became so high and the government resulted to borrowing, a factor that increased the UK’s external debt (Summers, 2012; pg. 98). Additionally, the debts bear a high interest figure and the UK government mission of ensuring a continuous growth in GDP, reduction in inflation and unemployment might be ephemeral. For instance, the government expenditure in 2013 was quite alarming. The debts of the UK further conflicts the government’s ability to increase GDP since it must continuously charge businesses high taxes to raise the money required in meeting the huge debt that it currently has. With an increase in tax, production costs will increase and businesses will have to increase the prices of their goods so as not to operate at a loss (IMF, 2013; pg. 127). Additionally, high taxes might force some businesses to close down. If some firms and/or companies leave the economy two major effects will be experienced: 1. Supply of goods will reduce: the reduction in the supply of goods and services imply that the demand will be high and the prices will hike. As such, there will be too much money (obtained from government expenditure) chasing few goods. Inflation will subsequently creep in (Financial Times Business Ltd, 2008; pg. 178). 2. People who were previously employed will be rendered jobless: This will increase the unemployment level, money wages will reduce, and the real wages will also reduce since there will be an increase in prices without a corresponding increase in money wages. Taxes will scare away investors, minimize consumption and ultimately the GDP will decrease immensely. However, the UK government is likely to default payment of its debt considering the interests rates that are above 12%. Such a move will lead to imposition of economic sanctions that will further destabilize the economy (IMF, 2013; pg. 167). UK in the present and future The UK economy is currently doing well and might be begrudged by many emerging economies. It has high employment levels, minimal inflation rates and a good annual growth (GDP) of 0.2%. however, if the government continues increasing its expenditure, the UK might soon find itself in another self-imposed crisis. The UK government should realize that the real risk from increased government expenditure is the burden of interest that has to be paid on the money borrowed to finance government activities. Though the government has the role of stimulating economic growth, it must use methods and/or policies that will not conflict with some of its goals and/or objectives. Apparently, tax reduction might work in further improving the performance of the UK economy but such reductions must not be at the expense of government revenues. (Giudice, Kuenzel, & Springbett, 2012; pg. 163) Vast as it is, the UK government requires lumpsome amounts of money to provide for its population and finance its numerous activities hence taxes must still be considered as an important source of the government’s existence. The Keynesian economic model suggests that full employment cannot be attained through stimulation of economic growth. Therefore, the government should stop seeking to attain a full employment level since that is almost impossible in an economy as suggested by Phillips (inflation rates and unemployment levels have an inverse relationship). Desolately, economists predict that the UK government might not be able to reduce its spending and debt, but will rather increase in the future as shown below (Economist & Tennent, 2014; pg. 29): If that happens, the UK economy will deteriorate significantly and investors and the entire world will shun the once envied economy (Economist & Tennent, 2014; pg. 29). A collapse of the UK economy will have far-reaching effects to the world economy hence the UK government should and must implement appropriate measures to safeguard an economy that is facing the risk of a crisis. However, the UK economy remains quite substantial in the contemporary global economy. References Agency, C. I. (2013). The CIA World Factbook 2014. New York: Skyhorse Publishing, Inc. International Monetary Fund (2013). The impact of uncertainty shocks on the UK economy. Washington, D.C.: International Monetary Fund. Economist, T., & Tennent, J. (2014). The Economist Guide to Financial Management (2nd Ed): Principles and practice. New York: PublicAffairs. Financial Times Business Ltd (2008). Financial times business yearbook. London: FT Business. Giudice, G., Kuenzel, R., & Springbett, T. (2012). UK economy: The crisis in perspective : essays on the drivers of recent UK economic performance and lessons for the future. London: Routledge. Summers, K. D. (2012). United Kingdom. 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