The UK Housing Market - Assignment Example

Business Environment Section-A Answer Considering the UK Housing market, the impact of some of the decisions on house prices: (a) If the government introduces some kind of incentives for prospective buyers then it is bound to give a boost to the housing sector as such. Reports suggest that British housing market has slowed considerably since last summer, therefore if the government announces a scheme for the first time buyers allowing them borrow 50,000 of their mortgage at 1%, a very low rate of interest, this is bound to give the housing sector something to cheer about because this will encourage the individual buyers to go become a house owner. This will be a good step as it is meant for first time buyers and not for investors/ house building firms. There will be a realistic rise in the real estate prices i.e. the prices will not rise too fast. (b) 5% tax on the sale price of each property means considerable burden for the house-building firms. If such a tax is levied on house building firms, they are bound to pass it on to the retail buyers i.e. it will result is increase in prices, which in turn means more costly proposition that will ultimately lead to decrease in demand. But some offers on the part of authorities like the offer of low interest rates to the retail house buyer will help offset this decrease in demand (like in part-a above). (c) If there's significant fall in the prices of construction material like bricks, mortar and timber then that is definitely a good news for the house building firms as well as the prospective buyers. This will make the housing market more lucrative and competitive as this will lead to competition amongst the house building firms to offer best bargains to the buyers, which in turn will offer a range of choices for the buyer. This will ultimately result in considerable reduction in prices. (d) The stamp duty is a must for any house property bought by any individual, as it is tax paid to the government. But supposing Gordon Brown makes an announcement on May 1, 2006 that stamp duty will be doubled w.e.f. then the very first impact it will have is a rush for registering the properties before June 1 and thereafter there'll be a phase for couple of months when there will be a fall in the number of property registrations. Thereafter it will not have much of an effect in the prices as such reason being it is not a factor directly affecting the existing prices, but it will lead to some lull in demand. Answer 2: MR = dR/dQ i.e. (change in total revenue)/(change in Quantity or demand) i.e. in general Marginal Revenue indicates how much Total Revenue changes by producing one more or one less unit of output. (a) False: When MR is positive, an increase in output causes an increase in total revenue. But this could be true in cases where MR is negative and increasing (e.g -5, -4, -3, -2 etc) (b) False: In fact TR is flat when MR is zero, because MR is basically the slope of TR. (c) True: Elasticity of demand is defined as the "the degree of responsiveness of quantity demanded to a change in price". PRICE ELASTICITY OF DEMAND = percentage change in demand/percentage change in price (d) True: Average cost = (Total cost)/(Quantity of output), Marginal cost (MC) indicates how much total cost changes for a given change in the quantity of output i.e. marginal cost = (change in total cost)/ (change in quantity of output). (e) True: Average variable cost (AVC) is relatively high at small quantities of output. As production increases, it declines, reaches a minimum value, then rises. This shape of the average variable cost curve is indirectly attributable to increasing, then decreasing marginal returns (and the law of diminishing marginal returns). Answer 3: Oligopolistic market: An oligopoly is a market dominated by few large suppliers. The word is derived from the Greek for few sellers. At times oligopolistic market give rise to a kind of monopoly in which the few suppliers/ manufacturers form a cartel. For example supermarket space is oligopolised by a few big names headed by TESCO who control majority of the market. Similarly the market of commercial airplanes has the oligopoly of a few, dominated by Boeing. Answer 4: (a). The circular flow of income is a simple model of the economy showing flows of goods and services and factors of production between firms and households. Firms produce goods using resources like capital, labour and entrepreneurship etc. Firms pay households a reward for using these factors. Interest for capital, rent for land, wages for labour, and profit for entrepreneurship. Collectively these rewards are called income (Y). This is a two sector model. State of equilibrium is a situation when the levels of income (Y), expenditure (E) and output (O) are equal, that is: Y = E = O This means that all household income (Y) is spent (E) on the output (O) of firms. Expenditure = E Income = Y (b). Most firms sell part of their output to foreign countries, and some households purchase foreign produced goods thus spending part of their income abroad. Under such circumstances we use the 5 Sector Model which addresses the issues of injection and leakages as well. Therefore, a significant increase in the UK tourist going to China is a leakage because the money that the UK tourist is spending on their China tour is meant for (as per the circular model) for consumption of the goods produced back home. (c). A weak US currency results in more foreign exchange expenditure by UK business community that means more spending for the same amount of goods or services. This is also a leakage. (d). A significant fall in the UK rates of interest means more finances available at attractive rates for the manufacturing sector/ industrial sector. That effectively means net Injection into the circular economy model. (e). Government increasing expenditure on health by 20% is also a form of injection into the economy. In such cases the government is redistributing the income that it had collected in the form of taxes etc. Answer 5: (a). GDP: It is a measure of a nation's total economic activity. Gross Domestic Product represents the monetary value of all goods and services produced within a nation's geographic borders over a specified period of time. Such data are generally released by the department/ ministry of commerce of countries. GNP: Gross National Product encompasses all the citizens of a nation within as well as outside the geographic boundaries. GNP measures the total amount of goods and services that a country's citizens produce regardless of where they produce them. Therefore, GNP includes such items as corporate profits that multinational firms earn in overseas markets. GNP = GDP + Net Income from abroad (b). The amount of National Income found by the income approach is not the same as the GNP at market prices found by the expenditure approach. In the expenditure approach, the value of GNP includes some types of expenses, which are NOT factor incomes earned by the citizens. They include depreciation, indirect business taxes, and government subsidies. GNP at factor cost = GNP at market prices - Indirect Business Taxes + Subsidies GNP at factor cost carries the meaning that we are measuring the total output by their costs of production. As output generates income to the factor-owners, it is also related with the value of national income. GNP at factor cost = National Income + Depreciation Depreciation is also a type of costs of production but will not become a source of income directly. So, it is included in the factor cost but excluded in the value of national income. GNP is a measure based on market prices, and in reality, market prices change all the time. The same amount of outputs may have different total market values provided that prices change. Therefore national incomes are more reliable at factor cost and current market prices. (c). I. UK Buys timber from Poland - Imports spending the forex will be reflected in GNP accounts. II. Polish tourists visit London - GDP accounts will reflect this as it is the income earned by local UK citizens. Answer 6: Budget Deficit: A budget deficit is defined as the excess of government spending over tax revenues. Such a deficit is financed by government borrowing. Balance of Payment Deficit: is a balance between all payments out of a country within a given period of time and all payments into the country. Most countries try to make this balance in their favour by trying to increase the payments into the country and reducing the payments out of the country. Cyclical unemployment: A change in unemployment levels that can be tied to cyclical economic change. Cyclical unemployment occurs when the unemployment rate moves in the opposite direction as the GDP growth rate. So when GDP growth is small (or negative) unemployment is high. Demand-pull inflation: When demand of a commodity is more than the supply, prices tend to increase. Such a price increases which result from an excess of demand over supply gives rise to demand pull inflation. Quantity theory of money: The quantity theory of money is a theory of the price level. It argues that inflation is caused by rapid increases in the quantity or money in circulation, and that deflation is caused by decreases or very slow increases in the quantity of money in circulation. Resources: UK Housing Market outlook, UK Market Outlook-March 2006, [online] available at http://www.housingoutlook.co.uk/Pages/uk.html. Read More