The UK Economic Analysis - Case Study Example

UK Economic Analysis University Student Id Course GDP/IP levels for the major markets The GDP in the UK is worth approximately $2860 billion representing 4.6% of the economy of the world. The economy has been experiencing growth, but the growth is expected to slow down between 2017 and 2018 due to the reduction in the investment plans. The incomes of the households started to squeeze due to the increase in the inflation (Kesieme et al., 2013). However, economists are expecting the UK to experience growth in the economy in the medium and short term. Currently, UK is in a position to borrow funds at low costs to ease the pressure associated with the public finances. It is a reflection that there are expectations of the market that the interest rates are likely to decline in the future. Figure 1: showing UK GDP Source: Kesieme et al., (2013). The economy of the United Kingdom consists of a broad range of various sectors whose both firms and firms have evolved greatly over time. Moreover, various changes in the levels of the Gross Domestic Product have been as a result of the supply-side forces which include the technological progress and also the demand-side forces which include preferences and tastes of consumers. However, the majority of the sectors are always simple, and therefore they view the economy as an important tool for developing policy, whereby they cannot all times capture the significance of specific activities. For instance, some of the environmental goods, as well as services, cannot be identified in data in a case when they are not classified into a particular sector. Output and employment The structure of the economy in the United Kingdom has shifted away from the manufacturing sector towards the provision of services, and specifically to the knowledge-intensive services which include; professional services, ICT, and the finance. Moreover, in the year 2011, the knowledge-intensive companies contributed to almost a third of the total output of the United Kingdom and also it creates many employment opportunities (Ball, Heafey, and King, 2007). However, by looking at the manufacturing sector of the United Kingdom, it has only contributed to fewer employment opportunities and around a tenth of the total UK output. Also, this shifting of the UK economy has been facilitated by the drastic growth of the service sectors but not the contraction of the manufacturing output. Furthermore, the shifting of the UK economy can be attributed to various factors which include; the technological progress and also the aspect of globalization. However, the rise in low-wage competition together with the technological improvements have caused the global prices for the manufactured goods to fall, thus leading to decrease in the share of Gross Domestic Product. Importantly, the professional business services and also the creative industries have greatly contributed to the widening of the UK economy (Stewart et al., 2004). Even though the comparison for the productivity across various sectors usually creates an outstanding picture for the differences which exist in the economy, what matters is the comparison of the UK firms to their competitors from different countries. Export The total exports of both goods and services from the United Kingdom economy usually account for approximately 3.4% of the total global exports, whereby two-thirds of those exports are specifically vehicles, electrical equipment, and the machinery. On the side of services, both financial services and the business services contribute to the largest percentage of the exports of United Kingdom (Stewart et al., 2004). Furthermore, taking a view about the sector performance, the United Kingdom has been a net exporter of the commercial services since in the year 2001. Also, the United Kingdom has been exporting manufactured products which include pharmaceuticals, beverages, shipbuilding, and also tobacco. However, there has been a deficit in some of the manufacturing sectors of the UK which include the automotive sectors and also in the sector of the metal products. The United Kingdom has been specialized mostly in personal services, communications, and also in business services. Technological Advantage The Technology Advantage is taken to account for the analogous concept which makes use of the patent data in the process of identifying the kind of technology that a certain country is much focused on. Under this concept, the United Kingdom seems to be specialized in the technology fields such as in the organic chemistry, civil engineering and pharmaceuticals (Alt et al., 2009). However, the UK is also less specialized in some technology fields which include optics, information technology and also in electronics. Therefore, as a result of these, the United States has been good in manufacturing pharmaceutical drugs. Besides, the aspect of technology improvements can lead to increased efficiency as well as specialization in the manufacturing sectors. For instance, through using the efficient production processes, high-quality products can be manufactured or even tailored to attract high value. Importantly, the rise in the demand for the new technologies in the field of communication has actually created significant chances for the expansion of businesses in the United Kingdom. Cross-sectoral impacts The economy of UK ensures that the various sectors are interdependent with the aim of achieving the set economic objectives. All various sectors in the economy of the United Kingdom are to some extent connected to each other directly or even indirectly. However, this has been the case since the output from one sector is used in another sector, either as a production input or as an activity enabler (Stewart et al., 2004). However, the interdependencies between various economy sectors mean that the barriers which might affect one of the sectors may also have an impact on the economic activities in the other economy sectors. Major equity market indices Equity market indices are used as the indicators of the changes in the security market. The values of the previous value of market index are compared with the current in the process of establishing the changes that might have taken place in the market. The changes realized after comparing the values of the market index can be used in the process of making the necessary estimations of the market behavior that is likely to take place. The predictions of the market indices can be made through the use of corporate events and macroeconomic changes (Ball, Heafey, and King, 2007). The stock index is usually calculated based on the price of some securities where the prices are multiplied by certain coefficients. The index can characterize the whole market based on particular securities and industry market that can include transport and telecommunications. Comparing the changes in the various indices can be used in giving a comparative assessment of development in different economic sectors. The equity market indices are calculated by stock exchanges and rating agencies. The index name contains some the securities that are contained in the index such as FTSE 100 and S&P 500. The equity market indices can also be based on the derivative instruments that can include options used in speculative and investment purposes. The interpretation of the index value is purely based on the prices of the instrument. The market index can be calculated using various methods that can include weighting by capitalization and weighting by price (Alt et al., 2009). The price-weighted method entails summing all the assets that are included in the market index and dividing by a certain coefficient such as Dow Jones Index. The capitalization weighted methods entail calculating the total market value associated with all assets in the index dividing by coefficient like S&P 500. The modern equity market indices are usually weighted based on free float weighting. The capitalization of a company includes the total value of the securities that are issued and calculated using the market price. However, the parameters that are used in the calculation of the securities can change over time because of the listed securities that are in the index (Willis et al., 2005). Dow Jones started counting the average change associated with market prices for more than 11 industrial companies. The equity market indices differ from each other based on economic factors, composition among other parameters. The FTSE 100 Index is said to be the most important in the stock index in Britain where it is computed using FTSE Group which is an independent company. Major Stock Indices As a result of the investors establishing a portfolio, there is more possibility of them getting interested in what happens in the financial world. Moreover, the financial stake in most cases relies upon the financial market. However, to the majority of the investors who are long term, the best advice to them is actually to ignore some of the financial news concerning the financial market (Willis, et al., 2005). Even though the investors may be interested to get updated about various substantial changes within the stock market, it is very hard for them to keep up with every kind of change. For instance, if an investor becomes anxious concerning the situation of the stock market, the investor should adjust his or her portfolio accordingly, by considering the aspect of risk tolerance. Therefore, it is good to get to know how the major stock indices functions. The UK Stock Indices However, the best-known stock index in the worldwide is known as the Dow Jones, which is also called the industrial average. Moreover, with regards to the financial news, the Dow Jones stock index is mostly referenced. Besides, the Dow Jones usually comprises of thirty biggest companies in the US which include; the IBM, Boeing, Bank of America and the Caterpillar among the others. The Dow Jones stock index was first established in the year 1898, to measure the overall stock market of the United States (Ball, Heafey, and King, 2007). Furthermore, this stock index makes use of the price-weighted calculation so as to achieve the average stocks. Also, the majority of the experts always have a belief that the Dow Jones stock index does not accurately represent the market of the United States as a whole. However, despite the weakness of this stock index, it has remained to be of major importance to the investors. UK’s FTSE Indices The FTSE index is the main index in the United Kingdom, where it is usually pronounced as the footsie. Moreover, the FTSE comprises of the largest companies, even though it is newer than the Dow Jones stock index since it was established in the year 1984. Just in the same way like the Dow Jones stock index, the FTSE index also measures the overall stock market across the UK industries. Some of the UK companies which belong to the FTSE index include; the Vodafone, Royal Dutch Shell, Prudential and the HSBC among others. Furthermore, the FTSE 100 is one of the FTSE indices even though it is the main referencing index which is used in the United Kingdom. Importantly, the FTSE 100 usually measures the first 100 largest companies basing on the market capitalization. Wilshire 5000 In the United States of America, the market stock index which is used is usually known as the Wilshire 5000. The main purpose of this stock index is to measure the stock market in the US. Moreover, the majority of the investors do not heavily rely on this stock index, even though it is used as the overall measure of the economic health of the US market. S&P 500 The S$P 500 is the commonly used market stock index as the referencing index in the US. Moreover, this stock index usually comprises of the biggest corporations in the United States of America, even though the Dow Jones is the most known stock index. Besides, the S$P 500 is always viewed as the benchmark of the stock market in America. Therefore, the majority of the investors in most cases they compare their returns to the returns of the S$P 500 and other investment companies which are large. Interest Rate/Inflation levels for the major market Interest rates are important in moving the currency markets. They are important in giving the foreign investors the reasons of shifting their investments from one state to the other in the process of searching for the safest and highest yields. The economic conditions in the UK have guaranteed investors safe investments as the government has been working towards ensuring that the economy is stable (Alt, et al., 2009). However, there have been some instances of economic instabilities hence affecting the interest rates. Interest rate rise is an indication that the costs of capital are high where investors can be discouraged to make investments. Besides, the changes in the interest rates can be used in making predictions of the future economic conditions. The interest rate in the UK is usually set considering the various economic conditions where monetary policy committee has the role of setting the rate. The Bank of England contributes a lot to the setting of the interest rates where it has a role in maintaining stable economic conditions. The official rate is repo rate that applies to operations in the open market of the bank including a group of counterparties that include building societies, banks, and security companies. Various factors affect interest rates in any country where the government has the responsibility of controlling the rates through central banks. The rates are used for controlling the supply of money and inflation through fiscal policy that is used in determining the costs of borrowing funds. The government of UK has adopted a monetary policy through the central bank to ensure that inflation is controlled. Inflation takes place where the prices of products are high especially due to increase in money supply or excess demand in the market. The current rate of inflation in the UK is 0.3%. The Central Bank has the explicit target inflation that is announced to the public. The monetary policy that can ensure proper support of the long-term growth in the economy can ensure prices are stable. It is through the changes in the prices that prices that inflation takes place affecting the purchasing power of the consumers (Alt et al., 2009). Central bank makes use of the interest rates as the primary short term monetary instrument where it can raise or lower interest rates in the process of controlling inflation. For instance, lowering the interest rates improves the economy while boosts inflation as people can borrow a lot of money hence increasing the supply of money. Figure 2: showing UK inflation Source: Alt et al., (2009). In the United Kingdom, inflation has been affected by various aspects. For instance, the decreasing prices of oil, and decline in the energy prices. There are expectations for low inflation worldwide where Europe experiences deflation because of keeping the rate of inflation low. The supermarket price wars in the United Kingdom have contributed to deflation due to the decline in the prices of the basic commodities. The supermarkets such as Sainsbury and Tesco have been attempting to adopt low pricing strategy with the aim of increasing the demand for the products in the market (Francis and Ramey, 2009). They are offering discounts with the aim of offering their products at the lowest prices possible where many of the supermarkets are controlling the costs to offer lower prices than the competitors. However, the bank of England has managed to control inflation where it has been increasing interest rates the moment inflation goes above 2% the aim of reducing the inflationary pressures. References Alt, V., Donell, S. T., Chhabra, A., Bentley, A., Eicher, A., & Schnettler, R. (2009). A health economic analysis of the use of rhBMP-2 in Gustilo–Anderson grade III open tibial fractures for the UK, Germany, and France. Injury, 40(12), 1269-1275. Ball, R., Heafey, M., & King, D. (2007). 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