United Kingdom Macroeconomic Indicators - Example

United Kingdom macroeconomic indicators Contents Contents 2 Introduction 3 Discussion 3 Growth of GDP over the years 3 Productivity 5 Inflation 8 Unemployment 10 Government Budget deficits 11 Interest rates 13 Fiscal Policy (Direct & Indirect taxes) 16 Conclusion 18 References 19 Introduction UK economy is considered to be the fifth largest economy of the world in terms of its gross domestic product. United Kingdom is able to maintain an increase in average growth rate of more than 2.5 % without facing any ups and down in the economy. The constant growth rate of United Kingdom is the result of maintaining low interest rate and providing easy credit facilities which encouraged the diversification and expansion of the businesses. The low rate of interest has captivated and motivated the individuals to purchase house which resulted in the increase in the price of the stock. The UK economy mainly faced the problem of repayment of the subprime mortgages that increased and generated concern for lending across the world which resulted in the situation of credit crunch in the economy. Though there was an increase in the spending by the government but the decrease or fall in the exports, investment and retail spending has lead to the rise in the government spending and which resulted in the increase in the unemployment in the economy. In order to mitigate the problems and providing appropriate remedy for developing the economy the government decided to interfere in the demand management of the market. The government of United Kingdom decided to cut or reduce the tax rate that will increase the disposable income of the people in the economy which will provide incentive for spending that will provide facilities for quick and speedy recovery in the economy. Discussion Growth of GDP over the years The Gross domestic product can be defined as the monetary value involved in the production of all finished goods and services at a particular time period across the world and it is generally calculated on the yearly or annual basis. The Gross domestic Product of United Kingdom has increased in the third quarter by 0.70 percent over the previous quarter. The Gross domestic product of United Kingdom when averaged was found to be around 0.61 percent till 2014. When compared with the services provided in the biggest sector of the developed nations in the economy which will result in more than 75% of the total Gross Domestic Product. The main segments includes 18% of the total gross domestic product from hotel and restaurants sectors, 11 percent from professional and support services, 20 percent from health , education and government sector, 9 percent from real sector, 9 percent from the real estate sectors. Though United Kingdom is considered as one of the biggest manufacturer of the world and its production includes more than 10 percent of the gross domestic product. Figure 1: Gross Domestic Product of United Kingdom Source: (Trading economics, 2014). In context of the external competitiveness it has been observed that United Kingdom has experienced a significant drop or decrease in the market share of export from the year 2007 to 2010. The trade balance of United Kingdom has faced a negative impact or trend from 1977 as result of the deficit that existed in carrying out trade activities. The export volume has experienced a significant growth rate in the economy during the time or phase of crisis. The export raised or increased by 3.3 percent in 2011 as compared to that in 2007. The total amount of gross domestic product is below the pre crisis. The external performance of United Kingdom is worse in the year 2012 than expected. The decrease in the current account balance of United Kingdom in 2012 was due to the limitations in the external demand. The household debt has decreased by 96% of the Gross Domestic Product (European Economy, 2013). Productivity The productivity is used to calculate, assess or measure the output that is produced by the worker for a definite or particular period of time. Productivity is considered as an important factor for determining the potentiality of the economy. The productivity in case of the United Kingdom has increased or expanded to around 100.40 in terms of index points in the third quarter of the year 2014 from the index point of 100 in case of the second quarter of 2014. The productivity in case of United Kingdom has averaged to around 69.28 index points from the year 1959 to 2014. In United Kingdom productivity is considered as the real value for the production of output by the unit of labor during a particular period. Figure 2: United Kingdom Productivity Source: (Trading economics, 2014). The countries which experiences a strong productivity of labor generally tends to receive or gain a benefit from the demand from its strong export, increase in productivity of labor, high rate of growth and low rate of inflation that will provide or result in the long term growth rate. During the beginning of the recession that is faced by United Kingdom in the year 2008 the productivity for the growth of labor productivity of United Kingdom has decreased below the historical average in the quarter 2 of the year 2014. And the output calculated on per hour basis has lowered by 16%. The productivity of United Kingdom has decreased in the year from 2008 to 2014 due to the recession. The main reason for the decrease in the productivity s due to the labor hoarding which has increased the unemployment, a situation of credit crunch prevailed in the economy due to the low investment in new capital. Figure 3: Negative real wages in 2008 Source: (Barnett, 2014). United Kingdom has experienced a decrease in the real wages in 2008 during recession. With the flexibility in the labor markets the cost of labor has decreased or reduced which resulted in the increase in productivity. The percentage change in productivity of labor can be represented by the graph below Figure 4: % Change in labor productivity Source: (Barnett, 2014). The graph represented in the figure 4 represents that the labor productivity has reduced in the economies of euro zone countries. Inflation Inflation generally calculates or measures the average cost of living. Therefore it resembles that the price of the goods increased more than the average increase in the price level. The inflation rate of the United Kingdom in 2014 is 0.50 percent. The inflation rate from 1985 was averaged to around 2.75 percent. The most important parts of the consumer price index of United Kingdom includes 16.2 % from transport, Recreation and culture included 13.4 %, food and alcohol comprised of 11.2 % and household equipment, furniture and maintenance included 6.1 %. Figure 5: Inflation rate of United Kingdom Source: (Trading economics, 2014). The inflation prevailed in United Kingdom due to the various domestic factors the reason is due to the rapid growth and boom in the economy. UK faced inflation more severely as compared to that of US and Euro zone. There are many global factors leading or resulting in the inflation in the economy. The core inflation rate of United Kingdom has expanded to 1.30 % in year 2014. In case of United Kingdom the core inflation rate records the changes prevailed in the prices that is required to be paid by the consumers for the basket of goods which does not includes those items that are subjected to volatility. The food inflation in United Kingdom has remained unaltered of -1.70 percent in 2014. The average percent of the food inflation in United Kingdom is 2.95 percent. The price for exporting goods and services from United Kingdom has decreased or reduced to around 94 index points. The average of the export prices of United Kingdom is 63.84 index points. The export prices resembles the rate of changes prevailed in the price of the goods and services that is sold to the foreign buyers by the residents of United Kingdom. The export price is influenced and affected by the changes in the exchange rates. The import price of United Kingdom has decreased to around 95.40 index points. The average import price of United Kingdom is found to be 64.76 index points. The import price mainly includes the price at which the residents of United Kingdom purchase the goods and service from other countries. Unemployment The global recession that occurred in United Kingdom has resulted in the decrease or the decline in the international trade and increase in the unemployment. The rate of unemployment I n the United Kingdom has remained fixed and unchanged for the last three months that is 6 percent in 2014. The average unemployment rate in United Kingdom is 7.25 percent from the year 1971 to 2014. The unemployment rate is used to measure and analyzes the number of people that are in search for jobs or employment as a percentage of the labor force. Figure 6: Unemployment rate of United Kingdom. Source: (Trading economics. 2014). The most strange and peculiar feature that has been experienced by United Kingdom for last two years is the situation of unemployment The economy of United Kingdom has faced a rate of unemployment in 2011. It has been observed that during the period of 2007 to 2013 that is at the phase of recession United Kingdom has increased a increase in the unemployment but at a slower rate as compared to the previous recessions The unemployment rate of 2.5 million that is faced by United Kingdom has a serious impact on the economy and increased the social problem of the economy. If United Kingdom have adopted and implemented a stronger recovery method than the unemployment rate of the economy would have been reduced or decreased and if effective method or measure is not adopted by UK then the problem of unemployment will continue to prevail and it will affect or influence the economy severely. Therefore it has been found that one of the most effective and efficient method or measure of reducing unemployment in the economy is by encouraging the flexibility in the labor market and which in turn will also benefit the Euro zone. The long term unemployment rate of the United Kingdom has been decreased to 2.30 percent in the year 2014 in the second quarter from the unemployment rate of 2.50 percent in the first quarter of 2014. The number of the people that are unemployed in United Kingdom has decreased to 900.10 thousand in the year 2014. The unemployed persons can be defined as the individuals who are without job (Barnett, 2014). Government Budget deficits The United Kingdom has experienced a deficit in the government budget of 5.80 percent of the Gross Domestic Product of the country in the year 2013. The deficit in the government budget has been averaged to a rate of 3.75 percent of the Gross domestic product of the country from 1995 to 2013. The government budget can be defined as the item that is required for accounting of the payments that is received or attained by the government which includes tax and other fees and it also includes the payments that are made by the government which comprises of the transfer payments and the purchases made. A budget deficit generally occurs when the government spends more as compared to the money that it has taken. Figure 7: Government Budget of United Kingdom Source: (Trading economics, 2014). The United Kingdom experienced the budget surplus of the government of 6698 GBP million in the year 2014. It is averaged to around 1551.51 GBP million. In United Kingdom the net lending or the net borrowing is explained as the difference that existed between the net financial asset acquisition and the net liabilities incurrence. The public finance of the United Kingdom revealed a deficit of 13.41 billion pound in 2014. The government spending in the perspective of the Gross domestic product has been decreased by 46.90 in the year 2013. And it has been decreased from 48.10 in the year 2012. The budget deficit explains or is referred to as the annual or the total amount that the government has to borrow in order to meet its shortfall existing between the government spending and the current receipt which includes the tax. The budget deficit is influencing other deficit in United Kingdom are cyclical budget deficit which includes the fluctuations or changes in the tax revenue and the spending, primary budget deficit which includes the interest that is paid on debt, structural deficit which explains the existence of deficit in case of the situation of full employment prevailing in the economy, the net borrowing which includes the deficit in the net investment, the current budget which includes the explanation of net cash flow at a specific period of time. Figure 8: Net borrowing of United Kingdom Source: (European Economy, 2013). The factors leading to the government budget deficit are level or extent of the interest payments, structural deficit, economic cycle, one of receipts and fiscal policy. Interest rates Interest rate plays n important role in determining the financial condition of the3 economy. Lower interest rate provides or leads to the reduction in borrowing which enforces or compels the country in making investment and spending which will result in increasing the aggregate demand and also towards the growth and development in the economy. The widening or the expansion in the growth and development of the economy leads or results in the occurrence of the inflationary pressure in the economy. The lower or decrease in the interest rate will result in reducing or decreasing the incentive as lower rate of interest provides or yields greater return from the saving done. The lower rate of interest reduces the borrowing cost and makes it cheaper; the decrease in the interest rate will reduce the repayment of the mortgage on the monthly basis. Reducing the rate of interest will attract or enforce in purchasing of the assets which increase the spending of the consumer. The depreciation in the exchange rate decreases the interest rate. Figure 9: Base rate and the GDP growth rate of UK Source: (Needham and Hotson, 2014) The interest rate of the United Kingdom as formulated by the monetary policy of Bank of England is maintaining the interest rate of 0.5 percent. The committee that was formed for maintaining the interest rate is found that it maintained a stock of the asset that was purchased is being financed by the issue of the reserve of the central bank for an amount of 375 billion pound. The average rate of interest in United Kingdom was found to be a rate of 8.02 percent from the year 1971 to 2014. In United Kingdom it is observed that the Bank of England has experienced operational independence and the decision taken on the interest rate by the monetary policy committee. The official rate of interest in case of the bank of England is known as the repo rate. The repo rate can be applied in the open market operations assumed by the bank of England with its counterparties and include the securities firm, banks, societies and buildings. The interest rate of UK can be explained with the help of the following chart. Figure 10: Interest rate of UK Source: (Trading economics, 2014). The interbank rate has decreased or reduced to the rate of 0.53 in 2014 of United Kingdom. Fiscal Policy (Direct & Indirect taxes) The fiscal policy can be defined or explained as the alteration of the spending of the government in relation to taxation for achieving the macro economics objectives by modifying the extent and the composition of the aggregate demand. The types of fiscal policy that is prevalent in the economy of United Kingdom are the discretionary policy which includes the policies that are decided and implemented for the change in one –off policy and the automatic stabilization which includes or explains that the economy is required to stabilized by adopting a process known as the fiscal boost or fiscal drag. It explains that the direct tax is mainly progressive in nature which indicates that the rapid increase in the national income will decrease or reduce automatically. Fiscal drag can be explained as the establishment of relationship that with the increase in income the influence of the increase in income for the better off decreases or reduces since they pay proportionately higher amount of taxes and the influence of the increase in income on the poor section of the people and the extent of unemployment in the economy is decreased or reduced and they begin to pay the tax. This can be explained as the effect or the result of the increase in the disposable income is maintained within limit. The fiscal boost can be explained as the influence of the fall in the income will result in the increase in the unemployment. Lower tax will increase the disposable income of the consumers that will result in increasing the spending of the consumers which will also increase or expand the aggregate demand that will result in the higher growth and development of the economy. The personal income tax of United Kingdom is found to be around 45% (Needham and Hotson, 2014). Figure 11: Public Spending of UK Source: (Needham and Hotson, 2014) The above figure represents the spending of the UK government in 2013 and the total spending provides a total of 673.9 billion pound. Figure 12: Sources of revenue of the government of UK. Source: (Needham and Hotson, 2014) The above figure represents the items through which the government of United Kingdom generates revenue. Conclusion It can be concludes that the economy of United Kingdom has experienced a steady and fast growth and development of the gross domestic product and the economy of UK has also experienced low inflation and low economy before the year 2008 which results in the generation and development of the steady business environment for investment . However the fall in the housing market and major and prime banks has resulted in increasing the unemployment in the UK economy. The spending undertaken on the consumer durables has reflected the confidence of the business and also the weak consumers in the economy. In order to deal with the situation it is required by the Bank of England to adopt the adequate fiscal and monetary policy which includes lowering the interest rate and quantitative easing which will result in the global downturn. The data above reflects that UK is recovering itself from the phase of recession and the future economy seems to be tough and the probability of recovery is uncertain and therefore it is required that the business should distinguish themselves for gaining competitive advantage in the economy. References European Economy, 2013. Macroeconomic Imbalances United Kingdom. [Pdf].Available at: http://ec.europa.eu/economy_finance/publications/occasional_paper/2013/pdf/ocp143_en.pdf. [Accessed 16 January 2015]. Barnett, V., 2014. Rouledge Handbook of the history of global economic thought. New York: Routledge. Needham, D., and Hotson, A., 2014. Expansionary Fiscal Contraction: The Thatcher Governments 1981 Budget in Perspective. Great Britain: Cambridge University Press. Trading economics. 2014. Economic Indicators. [Online]. Available at: < http://www.tradingeconomics.com/united-kingdom/indicators>. [Accessed 16 January 2015]. Read More