The Impact of the Decline in the Car Industry on the State of the UK Economy - Assignment Example

TOPIC: Discuss the impact of the decline in the car industry on the state of the UK economy (NAME) (COURSE NAME) (INSTITUTIONS NAME) 29th APRIL 2009 Macro Economics The macro economic indicators such as the economic growth, unemployment, inflation, demand and supply of commodities have been largely affected by the current economic crisis in the world. For instance, the CBI predicted that there will be an unemployment rate of three million before the next election in the United Kingdom, Germany. It also predicts a general drop in the output and increases in the prices of houses due to inflation. This variables have largely affected the car industry in the world where people have lost there jobs and more are still expected to loose their jobs soon because of the current economic crisis. The crisis has therefore affected the demand of the cars in the world and it has been contributed by other factors. General motors has widely been affected by the ad versed global economic threats which has led the company to reduce their sale ,off laying of employee within short period of time and hence affected the demand from customers in car purchase. The following are some of the economic factors which have resulted in the dramatic fall in demand for cars. The income gained by both the employee and the manufacturing firms are a likely hood effecting demand of goods and services. When employees are paid more and there is equality in salary payments, then they are likely to increase demand for a good or service. When the employee’s income and salaries falls due to unemployment, then they will be likely to reduce their demand for goods and services. This means that the demand for vehicles is likely to reduce in the car industry. The price changes in substitute goods and services, that is when the surrogate falls, the demand for the cars wills also fall. The price changes and rise in complement goods and survives in motor industry then the demand for purchase of motor vehicles has automatically fallen .this has lead the companies like BMW in Cowley to confirm job cuts in figure of 850 employees at its mini factory The interest rates in Germany has changed and some scenarios remained stagnant the economic retrain where the public is considering to give priority to house hold consumption has pushed down the interest is the public in car purchase as they consider this to be tertiary necessity .if the interests rate of borrowing money from financial institutions goes high then demand contracts for car purchase and services are substitute with necessity like housing. The interests rates in backs in England are expected to stagnate at very low key which will adversely affect the sales of general motors until the end of 2010.more job cuts are expected as many leading companies announces in making cut bucks due to worries of lending as the average earning and pay cut offs are expected. As the global downturn prolongs the growth rate is expected to flatten out by 2010. The leading companies having stuck by the global confidence crisis, a rapid fall in demand and credit constrains, many German companies have been forced to scale back investment. The speeding recession and impact of decreased energy prices and the VAT cut has pushed inflation down. Inflation is expected in financial institutions as interest rates are anticipated to slug in the current status for a while. The expectation of the consumers are high on the improvement of service provision at motor industries where currently the companies have hitches of achieves the clients expectation due to reduction of work force. For example the BMW Company in Cowley had to reinstate employees who had lighter employment rights along with the permanent one. This helped the company in improving their building of cars up to 230,000 last year. If for any reason the customers feel they lack the confidence in the company, they tend to decrease the purchases of motor vehicle and concentrate on savings. The way of laying the employees from their jobs has not been warmly welcomed as it was humiliating. Though it been tough for the employees working at BMW, the company has continually made top sale at the Mini and thus it own to treat its employee in better way. Sacking of employees in the companies in German would be hard as it is illegal to sack them without a detailed consent with government. The general motor has currently attempted to persistently attain betters and bigger sales by improving in quality and better model of their motor vehicles. Technologically this has been seen upon unveiling of new models of cars each and very day has boosted the sale of motor vehicles. This has resulted to fall of prices of The multiplier and how it is measured. Definition of the multiplier effect in micro- economics It basically refers to the initial amount of cash spent by the government that increases the national income. This means that a change in the aggregate demand eventually causes a change in the aggregate output for an economy that is multiple of the changes initially. How Multiplier is measured The multiplier effect is measured by dividing the change in equilibrium Gross Domestic Product (GDP) by the change in investment. It is applied by the government when attempting stimulate the aggregate demand (AD). It is normally done in the process of recession by many governments that are when the economy is in uncertainty. Multiplier = 1/(1-MPC) = 1/MPS; where MPC is the marginal propensity to consume while the MPS ins the marginal propensity to save. A fall in the aggregate demand The effect of the multiplier functions for the fall in demand. When a country looses the order of an export through a cancellation of planned investment project can have a negative multiplier effect on the economy of a nation. Effects of joblessness or unemployment In the depression period, individual are always afraid to spend. Businesses are always reluctant to employ workers sine they could not predict any pick up in the output sale. This is true especially to the car industry. "Firms are making cutbacks much quicker than in previous recessions because they are worried about lending," the CBI said. The recent economic crisis has hit the car industry which has eventually forced it into negotiations with the treasury for emergency support. There are fears that over 90,000 highly skilled jobs are at a high risk of being lost in the current economic crisis in the world. This has made many car industries to shut-down so as to save cash of face bankruptcy. For example recently in the BMW Company in the UK, it was announced that there were 850jobs cuts fro the industry. This means that the employed will have no work to do. The idea of jobs cuts has adverse effect to the economy as a whole. It will affect the aggregate demand by the government for its exports while a t the same time it will have an effect to the government expenditure to the economy. Since most people will be unemployed, then the government has an obligation to transfer payments that will sustain the social welfare of individuals in the society. Unemployment has an imminent effect on domestic violence, crime and health problems. It has psychological effects. How unemployment is measured Unemployment refers to the population that does not have jobs but has the skilled and that they are in the search for jobs. There they constitute the labors force that are unemployed. Thy also include the population who have given up looking for a job and those that are under employed. The labors force in measured by: The labor force participation rate= (Labor force/Adult population)x 100. The rate of unemployment is measured by: The unemployment rate = (Number of unemployed/Labor force) x 100. The effect of unemployment Unemployment causes loss in production and output. This is due to the fact that those that are unemployed have no capacity to add towards the Gross Domestic Product. Unemployment causes a decline in the standards of living. It therefore results to miscalculation of resources. The justification to this concept is that those that are employed will have the burden of paying for the unemployed. The effect of unemployment causes individuals to lose the valuable skills therefore leading to a decline in the market skills. The government deficit will increase since it is require funding the unemployed through transfer payment. The unemployment has an effect in job supply. This is because high supply a\of labor will lead to employer’s tendency of reducing their wage rate. Inflation Inflation refers to the general increase in prices of goods and services over time. It is cause by high growths of the money supply in the economy. There exist many measures of inflation. The most used type is the Consumer Price Index (CPI) and the Gross Domestic Pr Product deflator. The consumer price index (CPI) measures the price of the selected goods for example motor vehicles that have been purchased by a consumer. The CBI has forecasted that with the current speed of recession, collaborated with the impact of lower energy prices and the recent VAT cut is expected to push the CPI inflation to a low of -0.1% in the third quarter of the year 2009. It has also said that the output from manufactured products would harshly fall by 10 % and the general investments in business are expected to fall by 9.2%. On the other hand, the prices of houses will increase to 15.5% and 6.7% in 2010. The Cost of Living Index (COLI) are similar to the CPI and are often used to adjust the fixed incomes and the contractual incomes so as to maintain the real value of those incomes. The producer Price Index (PPI) is used to measure the prices that have been received by the producers. The subsidization of the price, taxes and profits may have an difference effect to the amount that is received by the producer and what the consumer paid. The Commodity Price Index measure the price of the selected commodities for example the price of cars. The car prices are weighted by the relative importance of the components to all in cost of an employee. The GDP deflator simply measure the combination of all prices of goods and services that are in the GDP How economic growth is measured In order to be sure to measure the health of any economy, then there is an urgent need to measure the rate of economic growth through the standardized methods. Economic growth is measured by the amount of production in a country over a certain period of time (Paul, 2005) The public may measure the growth of the economy through the number of jobs created. If jobs are being created, it means that wealth is spread. When a country does not create jobs instead cut down on jobs, the is likelihood the economy will be depressed The growth of the economy can be measured though the amount of money received in a city through property taxes. Growth is therefore felt when such taxes go up hence it is presumed that the values of properties have increased hence there is improvement in the welfare of the people. If on the other hand the values of the property is going down then the economy is said not to be growing. The economy is normally measured as the yearly percentage growth rate in a countries income accounting aggregate for instance the Gross National Product or the normal Gross Domestic Product (Paul, 2005). Reference Paul M. (2005) “Growth Theory” Aurburn: Haley Centre Information on the factors that affect demand available from www.ecoteacher.asn.au Retrieved on 28th April 2009 Information on the effect of demand on goods and services in the market available from www.bized.co.uk Retrieved on 29th April 2009 Information on “Unemployment” available from www.alex.edfac.usyd.edu.au Retrieved on 29th April 2009 Read More