Major Indicators of Inflation - Essay Example

Section Investigation of GDP Gross Domestic Product (GDP) refers to the market value of all final goods and services produced in a country within aspecified period of time usually one year. GDP is used by economists to measure the performance of a country's economy. Final goods refer to the goods which are bought by a consumer for consumption and not for use in production of other goods. (Wessels 12).The GDP of a country is a major indicator of the strength of its economy and the standard of living of its citizens. For example if the GDP of the UK is $22.8 billion in a given year and that of the US is $34 billion in the same year, then we can accurately say that the economy of the United States is stronger than that of the United Kingdom. Wessels however points out that this does not necessarily mean that the citizens of the US have better living standard than their counterparts in the UK. (21). GDP therefore cannot be used as the sole factor in measuring the living standards of the citizens of a country. However chances are that a country with a high GDP has a better standard of living than that with a low GDP. So what encompasses GDP' Well there are a number of components which when added together make up the GDP of a country. According to Sowell, they include Consumption which is denoted by letter C, Investment which is denoted by letter I, spending by government and finally exports and imports denoted by letter X and M respectively. Consumption refers to all the money spent by citizens of a country in buying goods and services which they expect will satisfy their needs. This includes money spent on food, purchase of new clothes as well as entertainment. (50-51) Sowell further notes that spending by the government is another component of the GDP. For example the UK government spends money to buy new military equipment and also pay its workers. (70).This expenditure is also part of the country's GDP. Investments into an economy are also used in calculation of the Gross Domestic Product. Investment refers to all money that is spent in purchase of new plant and machinery. It also includes spending by individuals in the purchase of immovable property such as investment in real estate or purchase of a family house. The final component of a country's GDP is exports and imports. To get the accurate value of GDP economist add the value of all goods produced in a country and then subtract the value of all goods which are imported. The total components of GDP is expressed mathematically as Y=C+I+G+(X-M). (Sowell 80-81) Wessels notes that measuring GDP is critical if economists are to determine the rate of growth of an economy. "In measuring GDP economists use two major methods, the expenditure method and the income approach". (qtd.in Wessels 71). The expenditure approach involves adding the total amount of money spent on final goods. In this case, GDP equals C+I+G+ (NX) where NX represents gross exports. The income approach involves adding all the income received by citizens of a country either through compensation, income from rental property, and profits of corporate organizations. Mathematically this can be expressed as GDP= Employee Compensation+Rental Income+Corporate Profits+Net Interest+Proprietor profits. UK GDP Figure for the year 2009 The GDP of the UK is estimated to be worth '315.5billion. What does this mean' The figure indicated above means that the total value of all goods produced in the UK in the 2008 to 2009 financial year amounts to '315.5 billion. This makes it the sixth largest economy in the world and third largest in Europe. How well did the GDP grow in 2009' In measuring the GDP of an economy, economists divide a given year into quarters. The growth of the economy in each quarter is measured and then a comparison is made with the previous quarter so as to note the difference which constitutes actual growth.(Wessels 55). For instance in the UK economy, GDP fell by 0.4% in the third quarter of 2009. In the second quarter of the same year GDP declined by a value of 0.6%. In the previous six quarters, the UK GDP has been on the decline. This accounts for the longest time history in which the economy has shown negative growth. When measured against the first quarter of 2008, statistics show that the economy declined by a massive 5.8%. The decline of GDP can be attributed to the world wide credit crunch that hit economies around the world. The UK government had to bail out its major banks such as HBO and the Royal bank of Scotland to prevent them from collapsing. Lending by banks was reduced and this affected the profitability of business and the purchasing power of individuals. With reduced consumption and investment then the decline in GDP did not come as a surprise. Outlook of the GDP. The UK economy is still in recession making it the only economy in the G7 club of members to be in this bad state. However the future does hold better fortune for the UK GDP. According to the Chancellor of the Exchequer Alistair Darling, GDP will rebound by the end of the year and grow by 0.7%. Consulting house KPMG however argue that the earliest the economy can peak is in the first quarter of 2010. Judgment: Bad. The UK is the sixth largest economy in the world. While the world's major economies have been badly hit by the credit crunch, the UK economy seems to be taking too long to come out of the crisis. Other big economies in Europe such as France and Germany have already returned positive growth rates for the same period. Consequently I draw the conclusion that the UK GDP is doing badly. This is evidenced by the fact that all the major economies have pulled out of recession while the UK is yet to come out. Consequently it's a bad day in office for the UK economy. Section 2 Investigation of unemployment. Unemployment occurs when an individual who is willing to work and has been actively seeking work remains unemployed. It is expressed as a percentage of those in labour force but who are currently unemployed. (Knight 101). For example as at August 2009 the unemployment rate for the UK was 7.9%. Unemployment rate is largely determined by the state of the economy. During times of recession, unemployment is at the highest level. This was witnessed recently as world economies slid into recession after a credit crunch which hit the US and most economies in Europe.The formula for measuring the unemployment level is thus depicted below. Unemployment rate=Unemployed workers/Total available labour force (100) Determinants of unemployment levels. In a modern economy like the UK, there are several factors which determine unemployment rates. According to Knight, recession is one of the major causes of unemployment. It refers to a period of time when an economy experiences a downward trend for a period exceeding two quarters. (55). For example we can accurately say that the UK economy is in recession after the decline in GDP in the second and third quarter of 2009. Recession is accompanied by downsizing by companies hence more job losses and thus high unemployment levels. Another major cause of unemployment is rapid change in technology. A labour force without the necessary skills will remain unemployed if their skills do not match those that are required in a modern economy. Technical areas such as manufacturing and engineering require highly qualified employees. According to a report released by the higher education office 65% of undergraduates in the UK study business and arts related subjects. (Nickell et al 155). Disability is another cause of unemployment in a country. Severe forms of disability such as amputation of legs and hands mean that an individual cannot engage in any meaningful activity although he/she might be willing to do so. Knight suggests that the willingness of qualified labour to work also determines unemployment levels. "When using this parameter to measure the rate if unemployment, economists argue that it is possible that a person trained in business might not get a job in his area of training". However there may be job opportunities in other areas such as community development jobs and other social care jobs. Whether such an individual is willing to work in a less than glamorous job also determines the rate of unemployment. (qtd.in Knight 81) Finally the ability of unemployed individuals to look for work also determines the levels of unemployment in a country. Nickell et al argue that while one is unemployed, the creativity one displays in job hunting determines how long one is unemployed. (115). For instance it is always hard for fresh university to get into formal employment due to lack of experience. However this can change if they first opt to work as volunteers and in the process get integrated into the organization. The willingness of nationals to work abroad also determines unemployment levels in the national economy. A good example is UK nationals who go to work in the Middle East where there are job opportunities. Types of unemployment. Structural unemployment. This type of unemployment refers to a situation where there is a variance between the available job opportunities and the available labour force in terms of skills. (Knight 22). For example there may be job opportunities in Information Technology. However it happens that majority of the available workers are trained in medicine. This means that such workers will remain unemployed although there are available job opportunities. This type of unemployment occurs when there is a technological shift in an economy. For example the introduction of computer technology can lead to structural unemployment. Frictional unemployment This refers to unemployment as a result of individuals changing jobs in search of more fulfilling careers. It mainly occurs among new entrants in the labour market. Such people may not get their ultimate job and so they hold on to a job which may not be in their line of training as they search for a better job. (Knight 25) Seasonal unemployment Seasonal unemployment refers to periodic unemployment which occurs at different times of the year. (Knight 25). For example the hotel industry experiences high unemployment levels during low tourist seasons. Unemployment figure for the UK in 2009 According to the figures released by the office of National Statistics, unemployment figures in the UK stand at 7.9% for the quarter ending in August 2009. This represents an increase of 0.3% from the previous quarter. In total the office of National Statistics estimates that there are 2.47million unemployed people in the UK. This represents an increase of 88,000 over the previous quarter. What does this mean' This means that the economy of the UK is still not out of the doldrums yet. As noted earlier one of the major signs of an economy in recession is decline in the number of available jobs. The figures shown above indicate that there was an increase in unemployment figures for a period exceeding two quarters. The number of individuals seeking welfare benefits from the state increased to 1.6 million in September 2009. This is the highest levels since 1997. The implications of high unemployment levels include higher crime and more chances of social unrest. What is the outlook' Unemployment is far more serious if it is more prevalent among the youth. This is because they are more likely to result to social evils should the situation persist. However the future looks good for the UK unemployment levels. The expected growth in the UK GDP in the first quarter of 2010 will result in more job opportunities. Further the government plans to inject 5 billion pounds in support of youth employment projects. Given that unemployment rate stayed stable at 7.9% in September then the future looks bright. My judgment. Bad. The consecutive growth in unemployment will have negative repercussions for an economy still in recession. Section 3 Investigation of inflation. Inflation refers to a continued increase in the general prices of goods and services in an economy within a given period of time. Anthony (17). A continued increase in the general price level of goods and services in an economy results in decreased purchasing power. This ultimately results in slower economic growth as a result of decreased consumption and possibly lower investment. To have a better understanding of inflation, Anthony explains it using a common man's approach. Here is an example, if you were filling a basket with consumption goods with say '100 and now it costs you '200 for the same amount of goods, then we can say that there has been a rise in inflation levels.(qtd.in Anthony 25). Countries have different levels of inflation and today Zimbabwe holds the record of the world's highest inflation rate. Causes of inflation. Generally inflation is caused by increased supply of money in an economy. With increased supply of money, traders quite often increase the price of commodities and this eventually leads to a higher cost of living.(Gale 101). This ultimately stretches and disadvantages the less economically well of individuals. There are two theories which explain the causes of inflation. "The demand pull theory and the cost push theory".(105) The demand pull theory holds that prices of products increase as a result of increased demand which outstrips supply. This causes a scenario of excess money chasing very few products. Demand pull may be caused by a reduction in taxes by the government or lower interest rates by banks. On the other hand cost push inflation is caused by businesses that increase the price of goods and services as a result of increased production cost. In the end consumers get fewer products for the same amount of expenditure. Rising cost of doing business may be as a result of increased wages, higher taxes by the government or rising cost of raw materials. Higher wage bill may be caused by increased demand by workers or as a result of competition hence a firm tries to match its competitors by increasing wages. This results in higher cost of doing business and may ultimately be passed on to the final consumer. Ultimately the price of goods goes up. (Gale 110) Sowell argues that increased taxation by the government is another contributor to high inflation. "For example if the government increases VAT, this generally affects the prices of goods on a broad spectrum".(102). Most firms will eventually pass this cost to the final consumer hence resulting in cost push inflation. There are some industries where increased cost of doing business leads to an increase in the final cost of goods. For example should the government increase taxation on oil, the cost of final goods in all sectors is likely to rise since transportation cuts across almost all industries. This would significantly contribute to an increase in cost push inflation. Types of inflation. Having discussed the causes of inflation, then it is important to look at the different types of inflation that may affect an economy. Moderate inflation. This is a type of inflation which is generally low and can be tolerated. In an economy with moderate inflation, prices rise slowly but the rate of inflation does not exceed 10%. Should inflation rise above the 10% level then it is termed as walking inflation. Moderate inflation is not dangerous to the economy but once it reaches the walking level then it becomes a source of concern. (Anthony 30). Most developed countries such as the US and those in Europe mostly experience moderate inflation. Galloping Inflation. According to Anthony, galloping inflation is also known as running inflation. It is inflation which hits a figure of up to 100%.(41). Most countries in Africa experience Galloping inflation mostly as a result of mismanagement of the economy and corruption. During a time of galloping inflation, prices rise quickly and even double or triple within a period of less than a year. Galloping inflation presents a major challenge to an economy and should be checked to prevent it from moving to the next level. Hyperinflation. Hyperinflation cannot be measured in exact figures. An economy experiencing hyperinflation will witness change in prices of goods at a very short duration of time such that measurement of inflation becomes irrelevant. The currency of such a country loses value. The best example of an economy which has witnessed hyperinflation recently is Zimbabwe. (Anthony 43) Inflation is measured using the Consumer Price Index (CPI). Experts in statistics take a look at the purchasing patterns of consumers and then take a sample of the most purchased products. Their average cost is noted, during the next month their cost is noted again and using a set year as the base year, then the increase in price is noted. When expressed as a percentage it forms the inflation rate of the current month. UK Inflation figure for 2009 As at September 2009 UK inflation rate was 1.1%. In the month of August the rate of inflation was 1.6%. This represents the lowest figure of inflation since 2004. What does this mean' This means that the prices of consumer goods fell in the month of September or remained unchanged. During this period records at the office of National Statistics show that gas and energy prices remained unchanged in the months of August and September. The other reason for reduced inflation for the month of August and September is the decline in prices of food and other non-alcoholic drinks. The prices of these goods fell by 0.9% hence contributing to the downward trend of overall inflation. However the largest contributor to reduced inflation according to the office of National statistics is meat which saw its prices drop by 1.2%. What is the outlook' The rate of inflation is likely to rise in the future due to a number or reasons. According to the Centre for Economics and Business Research the major contributor to the rise in inflation in the UK will be higher oil prices. Prices in the world market are expected to rise to over $80 a barrel by the end of the year and this will definitely lead to higher fuel prices in the UK. The trend has already been set since in the year 2009 since the price of petrol rose by 2.4 pence and this trend is expected top continue. This is likely to lead to a rise in overall inflation. The prices of luxury items such clothes and gifts are also expected to rise as the holiday season approaches. This is likely to lead top a rise in inflation by the end of 2009. Judgment. Good, Inflation at 1.1 is certainly good for the economy as it enables consumers and businesses to make long term plans since the purchasing power of consumers is expected to remain constant. Ultimately lower interest rate cuts down on the cost of borrowing and this encourages more investment into the economy. To which extent, according to the main measurements of economic performance (autumn/winter 2009), is the UK economy improving' Introduction. The United Kingdom is home to the world's sixth largest economy. In Europe, its economy is only rivaled by economies of Germany and France. It is a major player in the European Union and its capital London is the world's second largest financial centre. Just like the economies of other industrialized countries, the UK was hit hard by the US exported economic meltdown. Consequently the UK economy slipped into recession in the third quarter of 2008. After the release of the latest economic figures in October 2009 it became evident that the UK economy was still in deep into recession. This is after fellow big economies in Europe Germany and France moved out of the dreaded zone. The concept of Economic growth. Before determining the extent to which the UK economy has grown, it is imperative to first understand the term economic growth and know the parameters used to measure the performance of an economy. "Economic growth refers to any increase in the total value of GDP within a specified period of time" (Wessels 5). Thus if the UK GDP expands by say 1%, then we can say that there has been economic growth in the UK. GDP alone may not be sufficient to determine the economic performance of an economy. That is why other parameters such as unemployment figures and the level of inflation come into play in determining the general performance of an economy. (Sowell 118). So the three parameters, GDP, Unemployment and Inflation will be used to determine the performance of the UK economy in the autumn/winter of 2009. UK GDP in 2009. The UK economy went into recession in Q3 of 2008 and going by the latest GDP figures, it is still deep in recession. According to the office of National Statistics, in Q3 of 2009 GDP went further down by 0.4% this is in comparison to Q2 when GDP went down by 0.6%. While this shows a slight improvement it is still not enough to push the economy out of recession. GDP is calculated by adding the value of all final goods produced by various industries. Therefore a look at the major industries in the UK shows which ones had the least contribution to the overall GDP. The office of National Statistics further reveals that the service industry which largely includes hotels and other entertainment areas declined by 0.2 percent in the current third quarter. In the second quarter, this sector fell by 0.6%. The transport sector which is mostly affected by volatile fuel prices went down by 0.3%. This is in comparison to a fall of 1.8% in the previous quarter. The communication sector is factored in this sector and according to the office of National Statistics it was the largest contributor to this dismal performance. The hardest hit sector was perhaps the construction industry. Due to a slowing economy with low home sales, there was very minimal activity in this sector. Output from this industry thus fell by 1.1%. The Agricultural sector was also not spared by the slump of the economy. Its contribution to GDP fell by 1.6% while in Q3 it went down by 2.9%. The business and finance sector contribution to GDP also fell by 0.1%. In the previous quarter its contribution had declined by 0.7%. UK unemployment figure 2009. According to figures from the office of National Statistics, unemployment rate as at August 2009 was 7.9%. This represents an increase of 0.3% from the previous period. From June to August 2009 there were 2.47 million unemployed people in the UK representing an increase of 88,000. There are 1.63 million residents in the UK who are now claiming job seekers allowance from the government. This is the highest figure since 1997. However the number of employees declared redundant fell by 68,000 for the quarter but up 85,000 for the entire year of 2009.The number of new vacancies for the same period fell by 163,000. Inflation rate figure. This is perhaps the only sector where the UK economy is not performing too badly. Office of National Statistics reveals that the UK inflation rate for the month of September fell to 1.1%. In August of 2009 it was 1.6%. Low inflation is crucial in creating confidence in the economy. Low inflation was mainly as a result of a fall in prices of consumer goods such as food and non alcoholic beverages whose prices fell by 0.9%. The inflation rate is however expected to rise to 2.5% by the second quarter of 2010. According to a report published by the British Chambers of Commerce, a low inflation may not be good for an economy in recession since corporate profits are likely to come down hence discouraging investments in the UK economy. Conclusion. The figures presented above show that the performance of the UK economy in the year 2009 is not bad but it is improving. The economy went into recession in 2008 and hit an all time low of 2.5% decline in the first quarter of 2009. The figures presented above show that the economy is slowly moving out of recession. For instance, GDP in Q2 of 2009 declined by 0.6% and this improved to a decline of 0.4% in Q3 of 2009. While the improvement is negligible, it is clear indication that the economy has improved in 2009 and could move out of recession by the second quarter of 2010. All the other sectors show some easing off in decline a sign of better economic prospects. For instance a look at the agriculture sector shows that while its contribution to the GDP declined by 2.9% in the second quarter of 2009, the declined eased to 1.6% in the third quarter of 2009. The same scenario is repeated in the transport sector where by the decline in the third quarter was 0.8% while it stood at 1.8% in the second quarter of 2009. Another sign of a recovering economy is the rate of inflation which dropped to 1.1% in September. Unemployment statistics also reveal that youth unemployment has not risen since the start of the recession. This will be boosted by the government plans to inject ' billion in projects that will increase youth employment. Consequently it is correct to state that the UK economy is improving and will most likely move out of recession by the second quarter of 2010. Reference: Anthony, James Trevithick. Inflation: a guide to the crisis in economics. London: Penguin books, 1997. Gale, William. Inflation: Causes, Consequents, and Control. London, UK: Prentice Hall, 1991. Knight, KG. Unemployment: An Economic Analysis.Lan Ham, MD: Rowman & Littlefield, 1996. Nickell, Stephen., et al. Unemployment: macroeconomic performance and the labour market. Oxford, UK: Oxford University Press, 2005. Office of National Statistics, UK output decreases by 0.4%. Viewed on 29 October 29, 2009< http://www.statistics.gov.uk/cci/nugget.asp'id=192> Office of National Statistics, Unemployment rates rise to 7.9% for three months ending August 2009. 29 October 2009< http://www.statistics.gov.uk/cci/nugget.asp'ID=12> Office of National Statistics, CPI inflation 1.1% 29 October 2009 Read More