The Economy of the United Kingdom: a Macroeconomic Assessment - Report Example

A Macro Economic Study of the UK Economy of XXXX XXXX Submitted By: XXXX Number: XXXX Number of words: 2251 (Excluding Bibliography) United Kingdom: A Macro Economic Study of the Country’s Economy Introduction: This report aims at understanding the economy of United Kingdom. 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 (Kirkup, 2008). The economy of United Kingdom is the fifth largest in the world on the basis of the exchange rates and the sixth largest on the purchasing power parity (PPP). Also United Kingdom is one of the most globalised countries of the world. The Capital of United Kingdom - London is the major financial centre of the world. It is noted that the British economy has seen a chronic weak growth. According to International Monetary Fund in 2007, the GDP per capita of the country is the ninth highest (Kirkup, 2008). This report aims at understanding the situation of the country over a few years, base on the macroeconomic indicators. Further on in the report the statistics of the country’s GDP are included to help the reader understand the standing of the country over the years from 2003 until 2008. The next section of this report explains the basics of macroeconomics and the normal indicators used to study the country’s economic conditions at a given point of time. Also discussed in the report are the GDP of UK, real growth rate and the current account balances. A brief understanding of the fiscal indicators and the actual values of the indicators in UK are also discussed. The different indicators like the ratio of the fiscal deficit to the nominal GDP, Government expenditure and ratio with the nominal GDP, Revenue levels and the ratio with the nominal GDP are included within this section. Also the monetary indicators like the rate of growth of supply of money and the inflation rate is also discussed further in the report. Finally the international indicators are briefly discussed. The report also includes a section on the main problems faced by the country and the possible future prospects of the country are also discussed. Macro Economic Study: 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: National input (Gross domestic product): This refers to the output of the country. The output produced by any country is very essential and is the most important concept of macroeconomics. It refers to the total goods and services a country produces and is commonly called the Gross Domestic Product – GDP (Heakal, 2008). Unemployment: Unemployment rate plays a very important role in the macro economics of a country. The unemployment rate of a country helps macroeconomists analyse the number of people who are a part of the pool of labour however are unable to find work. It has been noted from previous reports that whenever an economy of a country witnesses growth which is indicated by the GDP growth rate the unemployment levels are likely to be very low. This is due to the simple fact that with the high GDP levels being reported it only means that the output of the country is higher, hence the requirement for labour is much higher to keep up to the levels of higher productivity of the country (Heakal, 2008). Inflation: Inflation refers to main aspects. It can either refer to the increase in money supply or the increase in price levels (Heakal, 2008). In context of the economy of United Kingdom, the further sub sections will focus on the major macro economic indicators like the real GDP, the current account balance, fiscal indicators, the monetary indicators, and finally the international indicators. As already mentioned earlier the economy of United Kingdom is the fifth largest in the world on the basis of the exchange rates and the sixth largest on the purchasing power parity (PPP). To get a more detailed understanding of the economy lets understand the economy based on four main classifications. These classifications are further sub divided to understand the economy in a more detail: Macroeconomic Indicators: As mentioned earlier the macro economics of a country refers to the economic behaviour of a country. There are several factors that act as indicators for macro economist to study the economic status of a country. The following are a few of the indicators that help understanding and analysing the economic situation a country: a) Real GDP: GDP plays an integral part of the economic indicators in the UK economy. UK uses three different approaches to estimate the GDP; these are GDP from a) Output, b) Income, and c) Expenditure. The GDP from the output refers to the production approach, which keeps the calculation based on the output or the production of goods and services within the economy. The main purpose of this approach is to estimate the contribution of each industry to the economy (National Statistics - GDP, 2008). Below is a graph which provides the latest statistics of the GDP of UK over the years. The graph shows the quarterly growth of the GDP since 2003 until 2008. Graph 1: Real GDP quarterly growth – 2003-2008 (National Statistics, 2008) Looking at the above graph, it is noted that 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 %. Also it is to be noted that the service industry has not seen any growth in the second quarter 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 (National Statistics, 2008). b) Real GDP growth rate: The GDP for United Kingdom in 2003 was calculated to be 1,805, 582, 000,000 and the country ranked in the fourth position with the GDP across the world. Over the years the GDP has been increasing and the GDP in 2005 was calculated to be a total of 2,198,789,000,000. This put the UK in the fifth position worldwide and the GDP has been constantly and progressively increasing over the years (Nation Master, 2008). c) Current Account balance: Current Account balance refers to the sum of balance of trade and factor income and transfer payments. It can be represented using this formula: Current Account = Balance of Trade+ Net factor income from abroad + Net unilateral transfers from abroad The balance of payments also plays a very important role in the economic statistics of the country. It is to be noted that the balance on payments throws light on the transactions of the UK residents and the rest of the world. The transactions that are included within this are the exports, imports, of goods and services, income flow of dividend from investments made by UK residents abroad, etc (National Statistics – balance of payments, 2008). Graph 2: Annual Current Account balance (National Statistics – Balance of Payments, 2008) Looking at the above graph (Graph 2), it is clearly seen that the country has been in deficit for a number of years. The deficits in the accounts have been very high when compared to the estimate for the Q1 2008 was revised from a deficit of £8.4 million to a deficit of £5.5 million. This mainly was due to the inclusion of fresh information from ONS inquires mainly for the foreign direct investments. Looking at the deificits over the years, it is calculated that the deficit in 2003- £18.3 billion = -1.6% of the GDP, 2004 - £25.2 billion= -2.1% of GDP, 2006- deficit of $45.0 billion = -3.4% of the GDP, 2007- £52.2 billion = -3.8% of the GDP (National Statistics – Balance of Payments, 2008). Fiscal Indicators: The fiscal policy framework was first introduced in UK in 1997-1998. The fiscal indicators were grouped into five main heads relating to the Government’s domestic fiscal policy and the European commitments. The five main heads were: a) Fairness and Prudence, b)Long term Sustainability, c)Economic Impact, d)Financing and e)European Commitment. Below are some of the ratios that play an important role in the economy of a country (Woods, 2008). a) Ratio of fiscal deficit to nominal GDP: b) Government Expenditure and ratio with nominal GDP: c) Revenue levels & ratio with GDP: Monetary Indicators: The monetary indicators generally indicate the effect that money supply has on the economy. These indicators help understand the current standing of the country based on the two main indicators a) growth rate of supply of money and b) inflation rate. a) Rate of growth of supply of money: The rate of supply of money has always been extremely high in UK over the years. The graph below shows how the supply rate is has been sharply increasing until May 2007 when it reached up to 14% and then there has been a sharp decrease in the rate up to May this year where it fell as low as 10% and then started to rise again till 11%. Economists believe that this is a solid drop for the rate however it is still quite a high percentage. The graph below shows the fluctuation in the rate of supply of money within the country over the past few years and it is very evident from this that the current rate prevalent in the country is extremely high. The graph below clearly indicates the above mentioned details. Graph 3: UK Money Supply Growth b) Rate of inflation: The change in the CPI of a country has a direct affect on the inflation level within the country. Consumer Price Index (CPI) measures the change in prices for retail goods and services. An increase seen in the index would mean that more sterling is required to buy the same amount of basic consumer goods – Inflation (FX Words, 2008). The CPI annual inflation for the country was targeted at 5.2 % in September from 4.7 % in August. The higher the inflation rate within the country the more difficult it would make the life of the citizens of the country. With inflation rate of 5.2 % the UK is facing high inflation and this seems to be at the highest point over the last three years. This can be clearly seen in the chart below (National Statistics – Economy, 2008). Graph 4: Annual Inflation Rate – 12 months 5 change International Indicators: The international trade of the country has been quite steady over the years and the country has been able to balance the trading with other countries well. It is noted that the exports of oil has increased for the UK. The international trade acts as an indicator for the economic condition of the country as well. Critical Problems: According to the deputy governor of Bank of England, the world economy has a ‘long way to go’. According to Professor Bean’s bleak assessment, the United Kingdom has seen an undisturbed and unbroken expansion for over sixteen years. This however has now led the country to an end in economic growth. Professor predicts the country to see a full recession by the end of 2008. The Economy of United Kingdom is the fifth largest in the world on the basis of the exchange rates and the sixth largest on the purchasing power parity (PPP). It is noted that the British economy has seen a chronic weak growth. According to International Monetary Fund in 2007, the GDP per capita of the country is the ninth highest (Kirkup, 2008). However the Government and the Bank of England are taking drastic steps to improve the condition of the country, including the macro economic factors like the full employment, Stability in prices, balanced external accounts and economic growth (Gore and Murray, 1991). Also the global slowdown of all economies in the world has affected UK in a number of ways. There has been a drop of almost 5% in the number of visitors to the UK and is slowing showing in almost every aspect of the markets (O’Grady, 2008). Future Prospects: United Kingdom being one of the best all through can surely make its way out of the problems. The future for UK is definitely very bright and it is very evident from the Government’s and Bank of England’s efforts that the country will soon be back to its strong position. The country might face a few issues in the coming year but it will not be affected very drastically for sure. Conclusion: The report has aimed at understanding the current situation of the UK in terms of economy. It is very evident that the country is facing a light crisis at the moment however this is not a permanent problem. Looking at the history of the country it is very clear that the country will be out of the crisis very soon. References FX Words, 2008, ‘Consumer Price Index – CPI - UK’, Accessed on 13 October 2008, Retrieved from http://www.fxwords.com/c/consumer-price-index-cpi-uk.html Gore, C., and Murray, K., ‘Macroeconomic Policy Objectives’, ACCA Students Newsletter, April 1991, pg 8- pg11 Heakal, R., 2008, ‘Macroeconomic Analysis’, Accessed on 14 October 2008, Retrieved from http://www.investopedia.com/articles/02/120402.asp Kirkup, J., 2008, ‘Economic Recovery Still a ling way off, Bank of England chief warns’, The Telegraph, 25 August 2008, Accessed on 11 October 2008, Retrieved from http://www.telegraph.co.uk/finance/economics/2795256/Economic-recovery-still-a-long-way-off%2C-Bank-of-En land-chief-warns.html Nation Master, 2008, ‘Economic Statistics: GDP by country’, Accessed on 13 October 2008, retrieved from http://www.nationmaster.com/graph/eco_gdp-economy-gdp&date=2005 National Statistics – Balance of Payments, 2008, ‘2008: Q2: UK deficit of £11.0 billion’, 30 September 2008, Accessed on 14 October 2008, retrieved from http://www.statistics.gov.uk/cci/nugget.asp?ID=194 National Statistics – Balance of Payments, 2008, ‘measuring UK transactions with the rest of the world’, 7 August 2002, Accessed on 14 October 2008, retrieved from http://www.statistics.gov.uk/CCI/nugget.asp?ID=18 National Statistics – Economy, 2008, ‘Inflation: Sept: CPI up to 5.2%, RPI up to 5.0%’, Accessed on 15 October 2008, Retrieved from http://www.statistics.gov.uk/cci/nugget.asp?ID=19 National Statistics, 2008, ‘GDP Growth: Economic Growth was 0.0% in Q2 2008’, 30 September 2008, Accessed on 14 October 2008, Retrieved from http://www.statistics.gov.uk/cci/nugget.asp?id=192 National Statistics - GDP, 2008, ‘GDP – Measuring the UK’s economic Activity’, 12 August 2002, Accessed on 15 September 2008, Retrieved from http://www.statistics.gov.uk/CCI/nugget.asp?ID=56 O’Grady,S., 2008, ‘Weak dollar and global slowdown prompts 5% fall in visitors to Britain’, 15 August 2008, The Independent, Accessed on 16 October 2008, Retrieved from http://www.independent.co.uk/news/business/news/weak-dollar-and-global-slowdown-prompts-5-fall-in-visitors-to-britain-897616.html Woods, R., 2008, ‘The role of fiscal indicators in setting fiscal policies in the UK’, Accessed on 16 October 2008, Retrieved from http://www.bancaditalia.it/studiricerche/convegni/atti/fiscal_ind/Role/6.pdf Read More