Economy in Britain - Assignment Example

The economic downfall that is not a part of Britain is one that includes a variation of factors that are linking to the overall problems within the economy. Understanding these difficulties, and how different areas of the economy are affecting the lives of citizens is one that can be factored together on different levels. Understanding how the businesses, consumer demand, restraints with money and overall downfall within the economy are causing a chain effect also provides specific information to how the economy has become the worst in over 60 years. 1. The first component of the economic factors being at their worst in 60 years, are specific economic indicators. One of the main components is linked to the jobs and employment options within the UK. This is at an all time low, and is expected to get worse within the next two years. For instance, it is being forecast ed that there will be unemployment numbers growing by up to 1.5 million in the next two years alone, which would move unemployment to a high of 9%. This is the highest it has been, with the only numbers coming close to this being in the 1990s. It is said that the unemployment rise is linked to the inability to run businesses with the same number of employment, as costs for the business are moving up, and demand for products and services within specific corporations are continuing to move down. This combination is forcing businesses to reach the need to cut down on employee costs, specifically through unemployment, cut hours of time and by taking out benefits available to employees (Paton, Nic, 2008). While this specific indicator is seen as one of the outcomes of the economic recession, there are also other areas that are causing the unemployment issue to continue to rise to all time highs. This specifically links to retail sales that are currently on the market. Despite the time of year, it is being shown that the retail sales within Britain are flat. Over a three month period, this has significantly fallen, by an average of 0.7%. Some stores have reached all time lows of sales over the past month, averaging at 4% (National Statistics, 2008). The lowering of the retail sales is then moving into other areas, not only within business, but also within banking and government trades. As the retail sales decrease, banks are unable to offer credit and loans. This is causing a downturn in the overall economy. As this occurs, inflation continues to rise, which is causing an increase in the deficit, currently which has moved up to 39 billion. This includes a consumer price index that has fallen by 4.5% in the past year, mortgage interests that have fallen by 4.7%, gross domestic products that have fallen by .3% this year and a trade balance that has fallen at an average of 3.5%. These are combining together as a whole to cause problems with the overall economy and is moving into a snowball effect with the availability of money with increase of prices (National Statistics, 2008). 2.a. It can further be seen that the economy is in the worst state it has been in the past 60 years through a comparison of the national income and the components to aggregate demand within the closed economy and the government sector. This can be seen through the table below. Table 1: Economy State With Government Purchases Domestic Income Consumption Expenditure Planned Investment Government Purchases C+I+G 0 25 125 150 300 100 100 125 150 375 200 175 125 150 450 300 250 125 150 525 400 325 125 150 600 500 400 125 150 675 600 475 125 150 750 700 550 125 150 825 800 625 125 150 900 900 700 125 150 975 1000 775 125 150 1050 1100 850 125 150 1125 1200 925 125 150 1200 1300 1000 125 150 1275 1400 1075 125 150 1300 1500 1150 125 150 1425 1600 1225 125 150 1500 It can be seen from this specific diagram, that as the aggregate demand increases the government expenditure stays the same. This means that, when there is more employment and money, the government sector benefits by moving out of a deficit and having the ability to increase options for the national income. When there is not a high amount of domestic income, the government spending still remains the same, meaning that there is a negative amount of money coming into the right areas and causing for a debt to move into place on a national level with the income available. When there is not as much money flow through employment, business and domestic income, the result is that the banks, businesses and government move into an automatic debt. 2.b. The housing market crash relates directly to this and reduces wealth available. Eventually, this will affect the aggregate demand and national income. This is because it means that there is less domestic income, as well as less consumption available. As this happens, there is also less income available for the government and banks and the aggregate demand moves to smaller numbers. In affect, the credit system and the banks have to inflate prices. This further brings down the demand for aggregate demand through real estate and banks, causing for even more inflation to take place with the government. This continues to happen, causing a deficit increase and an increase in debt with the national income and with the aggregate demand that is available. Because the housing market is within a closed economy, and is not dependent on any external forces, the cause of the debt and deficit from it is further increased with a withdrawal of the aggregate demand. The result is that the banks and government inflation will continue to cause money availability to decrease, and wealth among individuals will decrease as a result. 2.c. If the economy were in full equilibrium before the crash, at full employment, than different steps could have been taken to prevent the debt and deficit now occurring. The government can begin to offer employment options that will build demand within different businesses and sectors of the closed economy. As this happens, there will be more potential for aggregate demand to increase. The more that individuals can afford, the more likely there will be an overall increase with the national income available. This is because the expenditure within the government sector stays the same while the domestic income rises. This will eventually allow the debt and deficit to decrease. For the government to restore the equilibrium, there will need to be a building of demand within the economy through business and banks. For this to work effectively, specific policies will need to be put in place that balances out the credit system, the banking system and the income levels available. If employment is to rise at first, there will need to be a cap on the amount of income that is offered to individuals. This is because it can offer more employment to rise, and will stop the economic downturn. After this balances at a certain level, than the policies can be re-evaluated for rises and increase in income offered with employment so that the amount of inflation decreases. The more this employment occurs, the more likely there will be a movement out of the crash and the debt that has occurred. If there is not a cap, than there will still be an imbalance with the aggregate demand and with the domestic income available. The constraints that the government has with this economic downturn is linked to the amount of debt and deficit available. There will need to be a certain amount of investment in the economy to cause employment to rise and to offer more jobs and more demand for the economy. Until this happens, there will not be the ability to offer more employment, despite the policies for a cap of income. This means that there will need to be a slight overturn of the aggregate demand and more investment and inflation to cause the amount of unemployment to decrease. 2.d. To illustrate these two affects of the government options for the economy, the following graphs can be seen. Table 2 shows how the housing market crash causes a downturn in other factors of a closed economy, such as aggregate demand and the options for government spending. As can be seen, the inflation of the market. Graph 1: House Inflation As can be seen from this graph, the real house prices are continuing to increase, moving significantly higher from 1975 to 2008. This is the inflation that has occurred. As this happens, there is less demand for the housing, as it is not affordable with the inflation. This is combined with the inability to have higher domestic income available by individuals, which is causing a continuous rise in the housing, and less demand coming from consumers in this specific area. As this continues to happen, the credit system and banking areas are unable to balance out the equilibrium from the housing market because there is not the same amount of demand and profit available (Nationwide Building Society, 2008). At the same time, the ability for the government to offer more employment opportunity, can forecast a change in the crash and bring the economy back to full equilibrium, as seen in the graph below. Graph 2: Balance of Inflation and Employment As can be seen from this graph, the amount of inflation has to increase by the year. As this increases, the producer prices increase. If this is balanced with an increase in employment, than it will follow the amount of inflation and will balance the economy. This will then bring everything to an equilibrium with the government and business production. References 1. Paton, Nic. (2008). A Silver Lining? Management Issues in the Work Place. Retrieved from: http://www.management-issues.com/2008/11/3/research/a-silver-lining.asp. 2. National Statistics. (2008). Retail Sales. Retrieved from: http://www.statistics.gov.uk/cci/nugget.asp?id=256. 3. National Statistics. (2008). Latest Indicators of Prices and Inflation. Retrieved from: http://www.statistics.gov.uk/instantfigures.asp. 4. Nationwide Building Society. (2008). House Price Crash. Retrieved from: http://www.housepricecrash.co.uk/. 5. TSB, Lloyds. (2008). UK Inflation Data Key This Week. Economics Weekly: Retrieved from: http://www.actionforex.com/fundamental-analysis/weekly-forex-fundamentals/economics-weekly:-uk-inflation-data-key-this-week-2008071452710/. Read More