Macro-Economics Analysis - Example

Macro-Economics Analysis Course Name and Code Institution Name Faculty Name Insert Your Name Insert Your Number Instructor’s Name 29 April, 2009 Economy is driven by many factors that determine whether the economy grows or declines (recession). For the past year, economic growth has decline because of recession and has seen many industries struggling all over the world. One such industry in United Kingdom is the car industry. This as impacted negatively the economy growth of the country, played a role in inflation and increased the rate of unemployment. Thus, the aim of this paper is to discuss the economic factors that play major role in car industry, use of circular flow diagram and multiplier, and means of measurement of economic growth, inflation and unemployment, and its estimates for the near future. Economic factors Economy plays a crucial role in the way that goods and services are accessed and used by the consumers. Various economic factors contribute to the survival and way that industries operate. Some economic factors determine the way that the consumers utilize products and service, and a sector that has negatively been impacted by the economic factors is the car industry. The car industry has experienced a fall in demand for the cars for the past one year. This has resulted in many people loosing their employments while the unemployed cannot obtain easily a job. One economic factor that contributes to the fall of demand of cars is decrease of income resulting in decrease of disposable income. In most instances, when income increases, consumers tend to buy more goods, which is applicable to the car industry. Thus, the more income a consumer is accessible to increases the likeliness that the consumer will purchase a car. However, when the income falls or decreases, the consumer foregoes the car and tends to purchase another product. The loss of income may be attributed to factors such as loss of employment, inflation and an increase in demand of other essential products. Inflation is an economic factor that tends to increase the price of product due to some external factors. In this case, inflation does not affect the car industry directly, but it affects it indirectly. This can be through decrease of the disposable income because other essential or basic products have increased in terms of prices. Thus, the final amount that will be available will not be enough to purchase or acquire a car. Hence, contributing to the decrease of the amount of cars bought resulting in fall of the car industry. Financial crunch or recession is a major factor that has contributed to the diminishing car industry. Recession has contributed in many people losing their employments while industries are closing down. Moreover, accessing credit facilities has become harder. Thus, the unemployment reduces the income and the difficulty in accessing credit as negated the success of the car industry. This is attributed to the fact that many car buyers employ the use of credit to purchase the cars. Circular Flow Diagram The circular flow diagram illustrates the continuous production, income, factor payment and expenditure in the four import sectors: business, foreign, government and household that control the important markets of macroeconomic: resource, financial and product. The figure illustrates a simplified form of a circular flow in which it indicates the important factors: business, household, resources and product sectors (United Nations, 2007). On the other hand, multiplier is a specific number usually with a value that is greater than one that is used to explain and understand the multiplier principle. The multiplier principle brings into consideration cumulative reinforcements that are induced by the interaction that results from production, consumption, income, investments, taxes, exports and other shocks affecting the macro-economy. This principle is such named because minimal changes results in larger or multiple changes to the aggregate demand or production. Multiplier occurs because specific expenditures results in a change in the income, factor payments and aggregate demand, which also induces changes in expenditure e.g. consumption. Thus, for a consumer, the following diagram (sketch) illustrates the way that income and expenditure circulates within the diagram. To ensure that the system or the flow is unchanging or stable will be ensured by the expenditure section is equal to the income section (bottom). Thus, when the expenditure flow increase, it will concurrently increase the amount of income resulting in an increase of the GDP. Vice verse is true, when the expenditure decreases the income also decreases resulting in a decrease of GDP. The common measurement strategy that is used in determining the multiplier is the change of the equilibrium of the GDP is divided by the change in investment. Apply the same perspective in the car industry illustrates the impact of job loss. Job loss results in making people loosing their incomes, a factor that plays an important role in the income flow model. Thus, when the people loose their employment results in minimization of disposable income and at the same time, many people tend to save, since the economic situation is not convenient. Hence, the amount of income that is consumed decreases resulting in decrease in expenditure. Additionally, to ensure that there is equilibrium, the income section and expenditure section should be equal. Thus, the decrease in disposable income results in few amounts of cars that are produced by the firm (car industry). Hence, since the car industry play an important role in the contribution to the GDP, means that the decrease of expenditure and income results in the decrease of GDP growth. Nevertheless, due to the decrease of amount of cars that are produced and negative impact on the economic growth means that other sectors such as oil and other amounts that are utilized by the government are also decreased. This extrapolates jobless to other sectors such as banking. Macro-economic factors: Economic Growth, Inflation and Unemployment Economic growth is measured by gross domestic product (GDP), which measures the national income and production of a country. Thus, it is the total value of all final products and services that are produced by a given economy, and this, mostly is a country. Hence, the most common utilized strategy in measuring the GDP is use of expenditure method, which is given by (American Bankers Association, 2003): GDP= consumption + gross investment + government spending + (exports - imports) The main three approaches that can be used to measure the GDP are International Standards, National Measurement and in terms of Interest Rate. The international standard is contained in the System of National Accounts (1993), which provides procedures and rules for measuring the national accounts. The National Measurement is the method that each country uses to measure their GDP and mostly it is controlled by the national government statistical agency. In the case of UK, forecast illustrates that the future of the economy is not stable. For example, the statistics that are provided by the CBI indicated in Guardian (2009) illustrates that the manufacturing output will decrease by 10.1% and business investment will slow by 9.2% in 2009. Moreover, the CBI estimates show that the construction industry will slow by 23.5% while house prices will fall by 15.5% within the same period (2009). Nevertheless, it is estimated that the average earning will decrease by 1.1% within the first three quarters of the year while the entire economy is expected to contract by 3.3%. Conversely, the GDP by 2010 is expected to be 0%. The impact of the fiscal stimulus package will be felt in the 2009/2010 economic period in which it will increase borrowing by 10.6% while in 2010/2011 by 11.8% (Guardian, 2009). Thus, this statistical estimate illustrates that the economy will continue to decrease drastically within the next few years. Economic growth plays an important role in availability of employment, thus a decrease in GDP results in a decrease of job resulting in unemployment. Unemployment can be termed as the labour force that us ready to work within given conditions and wage rate. However, the definition of unemployment is simple but its measurement is difficult. Economists usually utilize the unemployment rate, which is given by dividing the unemployed workers by the total labour force. However, the International Labour Organization (ILO) offers four different methods that can be used to calculate the unemployment rate. Labour Force Sample Surveys is the commonly preferred method because unemployment rate is determined by surveys that have been carried out and specifically define the unemployed group e.g. in terms of race and gender. The other method that is rarely been used is the Official Estimates that combines information that is available from the other three methods. Another method is the use of Social Insurance Statistic in which unemployment benefits is used to compute the number of people who collects benefit and persons who are insured. Lastly, Employment Office Statistics utilizes the monthly tally of persons who are not employed who apply through the employment offices. From the estimates and forecasts that are available from the CBI and indicated in Guardian (2009) illustrates that by 2010, the unemployed people will reach one million. Moreover, Hopkins (2009) indicates that before the next general election, unemployment is expected to have reached three million. Of late, Macalister (2009) says that 850 job were lost in the BWM plant at Cowley, Oxford. Moreover, the same plant reducing the working days from seven a week to five, creating loss of jobs. Nevertheless, other car industries such as Jaguar are expected to cut jobs. General Motors (GM), with a work base of 5000 people in Britain is expected also to cut jobs. Unemployment and economic growth is crucial in determining inflation. Inflation is the increase of value of a given product. Calculating inflation is a tricky matter for government agencies, but there are two common methods that are used to calculate inflation: Consumer Prize Index (CPI) and Producer Price Indexes (PPI) (Hopkins, 2009). The CPI uses to measure the price of goods and services that are used by the consumer e.g. automobiles and gasoline. PPI is the average change that is obtained through obtaining data on the selling price by the domestic producers of services and goods. The available forecasts illustrates that CPI will be -0.1% in the third quarter of 2009. Moreover, in 2010, the Bank of England estimates that inflation will be less than 2% (Guardian, 2009). Generally, the car industry has been affect by the current economic problems. This has seen the amount of cars that are sold to decrease and increasing the rate of unemployment. Moreover, the decrease in activities associated with the car industry has affected the growth of economy and contributed to inflation. Moreover, the circular flow income diagram illustrates that the poor functioning of the car industry affects the entire economy of the country. Bibliography American Bankers Association, 2003, Economics: Fundamentals for Financial Services Providers, London: Kogan Page Publishers. Baumohl, B., 2007, The Secrets of Economic Indicators, 2nd Ed. London: Wharton School Publishing. Hopkins, Kathryn, 2009, Inflation, Available at: http://www.guardian.co.uk/profile/kathrynhopkins%22%20Kathryn%20Hopkins%20%3Cbr%20/%3E [Retrieved 29 April 2009] Hopkins, Kathryn, 02/16/2009, Unemployment Forecast to Reach 3 Million Before Next Election, Available at: http://browse.guardian.co.uk/search?search=CBI+3.3%25&search_target=%2Fsearch&fr=cb-guardian [Retrieved 29 April 2009] Macalister, T. & Pidd, H. (February 16, 2009), Uproar in Cowley as BMW Confirms 850 Job Cuts at Mini Factory, Available at: http://www.guardian.co.uk/business/2009/feb/16/bmw-mini-job-cuts [Retrieved 29 April 2009] Milner, M. 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