The Factors Responsible for the Economic Downturn in the UK - Assignment Example

Economics second assessment Table of Contents Question 3 Question 2 5 Question 3 7 Reference 10 Bibliography 10 Allen, R. E. (1999) Financial crises and recession in the global economy (2nd Edition) Massachusetts: Edward - Edgar Publishing. 10 Mankiw, N. G. (2008) Principles of Economics (5th Edition) USA: Cengage Learning. 10 Question 1 1. The market being referred to in this case has oligopolistic traits, which is generally noticeable in the real aspect. The main features of this type of market are discussed as follows – a) Few sellers and a large number of buyers. Due to a few number of sellers operating in the market, each of them has a large concentration of power in their hands. b) The products that are on sale are analogous in nature with a few apparent distinctions like brand names, etc. Hence, it can be said that there are some monopolistic features wrapped up in an oligopolistic market structure. c) There are prominent barriers of entry into the market, due to the high degree of influence that each seller portrays. These constraints are erected artificially to enable the players reap abnormal profits. These abnormal profits help the sellers to further decide upon the strategies to override their rivals. d) Each of the sellers decides the appropriate marketing strategy depending on the decisions made by his rivals. Hence, there is a lot of interdependence among the sellers. e) The competition between the different players might be in terms of price as well as the quantity of the concerned products. 2. The three main areas of concern identified by the Office of Fair Trading and Competition Commission are “the use of barriers to entry, the lack of effective price competition, and the relationship between the large supermarket chains and their suppliers”. All these three revelations have been made based on certain observations made by the office. These observations and the adjoining discoveries have been discussed as follows. “The use of barriers to entry” – This discovery is associated with the fact that there has been a rising concentration in the UK grocery market over the years. With the UK grocery market being a profitable sector, it is expected that there must be a high tendency among people to enter the market as sellers. But despite the fact, there is a lack of such activities, which led the office to think that the existing sellers have been taking the help of barriers to entry mechanisms. “The lack of effective price competition” – There is a clear sign of lack of effective price competition among the players in the market. This is the reason why there is a concentration of power among the players in the market. Had there been a significant price competition among the players, there would not have been a concentration, implying that the prices would have not only been low, but there would also have been an absence in the barriers of entry. “The relationship between the large supermarket chains and their suppliers” – The interdependence between the large supermarket chains and their suppliers is prominent from the fact that there is a high concentration of power noticeable between them. This indicates that each of them build their strategies depending on those of the rest, which is why the power is focused in the hands of a few and there is almost a planned decline in the number of entrants to be allowed in the industry. 3. Tacit collusion implies the collusive activities that the firms or different players in a game engage in order to earn the utmost profits possible from operations. Collusions are generally tacit in nature, since explicit collusions are usually discouraged by anti-trust laws. The forms of tacit collusion that the supermarkets can enter into are involved with either price or quantity fixation. In the former case, the firms can internally fix the price at which they will make the commodities available to the consumers, while in the latter one, the amount of quantity to be supplied is fixed beforehand, so that the market price of the commodity will automatically rise (Ivaldi et al., 2003). Question 2 a) The factors responsible for the economic downturn in UK are discussed as under – 1. A sharp decline in the house prices in the nation. This decline was on account of four major reasons – firstly, unavailability in mortgage finances, which has made people control their desires or rather, demands for new houses. Secondly, the per capita income in the nation has fallen by a great extent leading to low affordability ratios. The fall in income is on account of high unemployment rates within the nation, which could again be cited as a third cause since a high rate of unemployment would mean a lower aggregate demand in the economy. Fourthly, the declining house prices would have a repelling effect on the investors, who would never want to buy them at a time when they are falling. 2. Transformations brought about in the epicentre of the crisis, i.e., the USA led to a crash in many of the neighbouring economies too – especially those highly dependent on USA both financially and psychologically. There was a widespread credit crunch problem in the economy of UK following the crash down of the Lehmann Brothers and other big financial houses. This credit crunch was mainly brought about by the withdrawal of private resources from the market by private investors as well as a fall in the amount of spending by the consumers and traits to invigorate savings for future consumption. 3. A global meltdown that adversely affected many international aspects of UK like trade that experienced a depression. In the era of globalisation, a large proportion of a nation’s GDP is dependent on international trade, which is why a fall-down led to a depression in the economic growth of the nation as well. This economic downfall is more like a vicious cycle that has resulted to continued effects of the meltdown. b) The prospects for recovery of the economy of UK are – 1. Firstly, there have been large movements around the globe towards correcting the harms made during the recessionary phase, which is a clear indicator of the fact that the economy of UK is actually moving out of this recessionary phase. This is because, with all the nations around the world concentrating so highly on development aspects, there are increased activities in the global trading sector of which UK is an integral part. The higher the imports and exports activities are, the greater are the possibilities of additions to the GDP. 2. There was a surge in retail spending in the UK, suggesting that the people have regained their confidence in the domestic government and the financial sector. This has wiped out the problem of credit crunch partially. 3. There had been improvements in the unemployment figures in the nation since 2008, suggesting that the production activities within the nation have increased dramatically (Sentance, 2009). Question 3 a) The benefits of trade imply the advantages that all the participating nations enjoy on account of their involvement in international transactions, from a cost as well as quality aspect. Opening up or liberalising the economies will enable people to enjoy better quality products at cheaper rates and thus help them in maintaining a better living standard. In a closed environment, i.e., in a protective environment, people are not only prevented from enjoying the consumption of better quality foreign goods, but in cases of higher cost of production, the national government has to bear a larger expenditure as well. Moreover, as the principle of comparative advantage focuses, the prospects of specialization are lost as well. According to the principle of comparative advantage established by David Ricardo in 1817, profits could be generated by means of specialisation. If one nation is found to produce a commodity at a cheaper rate than another one, then there is no point in the latter economy producing the same commodity; rather it can concentrate itself in producing something else in which it specialises, i.e., can produce at a cheaper rate (Samuelson, 2008). For instance, consider the following example of United States and France, where both the nations are found to be producing both food and clothing. The above diagram tries to demonstrate the principle of comparative advantage through representing the hypothetical production possibilities curves in either case. For USA, there are three possibilities of production, either produce 1000 units of clothing and no food, or produce 500 units of clothing and 250 units of food or produce 500 units of food and no clothing. The first and the last cases will be infeasible in the absence of trade and thus, the equilibrium production will be 500 units of clothing and 250 units of food. Similarly, for France, the equilibrating production will be 480 units of clothing and 180 units of food. In this case, there will be a total production of 980 units of clothing and 430 units of food. If now, barriers to trade are removed, then there are chances of producing more of either commodity and consequently consuming more as well. Now USA can concentrate on the production of just food and France can focus its attention to the production of clothing only. This way the total production of food will be 500 units and that of clothing will be 1200 units as opposed to the previous productions of 430 units and 980 units respectively. There will be free trade occurring between the two nations and thus from a final perspective, there will be an improvisation in the equilibrating consumption baskets in both the nations. In USA, the consumption basket comprises of 600 units of clothing and 300 units of food, while for France it consists of 600 units of clothing and 200 units of food. It must be noted that the consumption positions of either nation is far better than their previous situations. This is where the justification of the principle of comparative advantage lies (Wessels, 2000). Benefits of trade and the principle of comparative advantage go hand in hand. One thing that must be noted however is that, benefits of trade and also that of comparative advantage can arise only in case that a liberalised environment is offered to the participating nations. b) The protectionist policies that the US and the EU have adopted to shelter their indigenous sectors from foreign competition could be justified in one sense. If the weaker domestic sectors are not protected in the initial stage and left exposed to fierce competition from their foreign rivals, they perhaps might never grow and thus will continue to remain weak despite their innate potentials. In such circumstances, it is the responsibility of the national government to protect their domestic firms and help them grow gradually, so that they are able to give equal competition to their rivals. However, it must also be noted that too much of protection might even hamper the prospects of the nation. A life-long protectionist policy will lead to a reduction in the chances of the national consumers to enjoy the consumption of better and cheaper products. This is because with the indigenous farms believing that they will be enjoying a long-term protection, they will have a tendency of never improving on their quality and showing laxity in their operations. Reference Ivaldi, M. et al. (March 2003) “The Economics of Tacit Collusion”, Final Report for DG Competition, European Commission. Available at http://idei.fr/doc/wp/2003/tacit_collusion.pdf (Accessed: January 4, 2010) Samuelson, N. (2008) Economics (18th Edition) New York: McGraw-Hill Sentence, A. (November, 2009) “Prospects for the British economy after the financial storm” Available at http://www.bankofengland.co.uk/publications/speeches/2009/speech411.pdf (Accessed: January 4, 2010) Wessels, W. J. (2000) Economics (3rd Edition) New York: Barron’s Educational Series. Bibliography Allen, R. E. (1999) Financial crises and recession in the global economy (2nd Edition) Massachusetts: Edward - Edgar Publishing. Mankiw, N. G. (2008) Principles of Economics (5th Edition) USA: Cengage Learning. Sabillon, C. (2008) On the causes of economic growth: the lessons of history. USA: Algora Publishers Read More