How Supply and Demand Affects the British Economy - Essay Example

The aim of this paper is to do this, as well as look into all related elements and issues enveloped in this subject matter. This is what will be dissertated in the following. The British economy is considered as being "a parasite on the rest of productive capitalism" (Roberts, n.d.). However, in the European Commission's latest assessment of EU finances, it was predicted that the UK economy would grow by 2.2% this year and by at least 2.6% in the year of 2004. "The labor market has remained strong despite the global slowdown with the unemployment rate being at around 27-year lows," said the European Commission.

(Osborn, 2003). As well, inflation in Britain is much lower than that of most other EU countries. Economic shocks can cause unpredictable damage and changes in aggregate demand and short run aggregate supply which lie outside our normal macroeconomic models. As a result, a new equilibrium level of national output is achieved. However, "The unpredictable nature of these shocks creates a fluctuating rate of economic growth and may require some sort of macroeconomic policy response." (Tutor, 2005).

To the UK economy, which is an open economy, an example of a demand shock would be that of a recession in a major trading partner such as the United States. Meaning that, if the United States were experiencing a recession, real disposable incomes of US consumers would fall and hence demand for imports would fall as well. Although some people argue that because the UK has not entered recession international events have therefore not had a great effect on economic growth; however, this is not true the UK has suffered due to the global downturn but this has, to some extent at least, been offset by continued levels of consumer confidence the reflationary effects of the decision by the Monetary Policy Committee to reduce nominal interest rates still further to their current level of just 4.0%. "Cheaper money has been a key factor sustaining both confidence and consumer spending.

The continued strength of house prices and low unemployment also helped to limit the impact of the demand shock that hit the British economy." (Tutor, 2005). Inflation is the process in which prices rise in the domestic economy, of which are reflected in the reduced purchasing power of a national sum of money over time. General price inflation is a fall in the purchasing power of money within an economy, as compared to currency devaluation which is the fall of the market value of a currency between economies.

The particular extent to which these two phenomena are related is open to economic debate, though the comparison of a currency to foreign currencies is based on investor demand for currencies, and therefore must at least partially be a matter of perception. The issue of inflation is incredibly important in British politics on account of its effect on the purchasing power of both the consumer and business, and the corresponding linkage that the declining value of wealth and income has to the general economic health of the country.

The law in Britain of supply and demand results in the rich getting richer and the poor getting poorer. Once a region or country is ahead of the economic pack, it then