Essay: Economic principles in the UK

Boom

In boom situations in firms, output and employment are expanding and the level of aggregate demand for goods and services is high. usually, businesses use the opportunity of a boom to raise output and also widen their profit margins.

  • Businesses produce more goods.
  • Consumers spend more money.
  • Less money is spent by the government on unemployment benefits
  • Prices tend to increase due to extra demand

Slowdown

A slowdown occurs when the rate of growth decelerates but national output is still rising. If the economy continues to grow without falling into outright recession, this is known as a soft-landing. Slowdown is a period when output slows down due to a reduction in demand.

Recession

A recession means a fall in the level of real national output declines, when the rate of economic growth is negative. During this period, businesses would cut back on production and some businesses may go bankrupt. Consumers spend less money, Individuals may lose their jobs and prices start to fall. Unemployment is likely to increase. Firms may lose confidence and reduce investment.

Economic Recovery Recovery is when the business starts to recover from recession, the image above shows recovery is when business is inclining towards the BOOM. The pace of recovery depends in part on how quickly aggregate demand starts to rise after the economic downturn.

Inflation

Inflation means that prices increase and more money will need to be paid for goods and services such as prices for haircuts and chocolate bars will increase. When prices increase therefore people may buy fewer goods, the economy might suffer. People need to keep asking for pay rise to match price rises. This can cause problems at work. Inflation is important especially for businesses, it can encourage them to take risks and invest, leading to a higher growth rate and less unemployment.

Gross Domestic Product

The GDP is the value of all the goods and services produced within a country, usually measured over one year. GDP is measured by output, by expenditure, or by income. All three methods should give same result. GDP is important for policy makers and central banks, it enables them to judge whether the economy needs a boost or restraint, and to see if a threat such as a recession could occur.

Unemployment

The unemployed are people able, available and willing to work at the going wage rate but cannot find a job despite an active search for work. There are two ways of measuring unemployment by using the Claimant Count or Labour Force Survey. The graph below shows level of unemployment for social welfare purposes. The government need to budget and wants a forecast of future payment levels to the unemployed

Measuring unemployment is important because the government needs to know so it can intervene if necessary.

Balance of payments

Records financial transactions made between consumers, businesses and the government in one country with others. It lists the trade in goods and services. Balance of payment shows how much money is going in and out of a country.

Balance of payment is important, the figures above tells us about how much is being spent by consumers and firms on imported goods and services, and how successful firms have been in exporting to other countries

Task 3

Two thirds of people in the UK are estimated to own their own home. This shows that the housing industry has a big impact on the uk economy because of the large number of people that own their own house and because if there was a downturn in the price of houses, this will have a negative effect on the wide economy because if the house prices fall, people might lose their confidence on spending money and this would affect the demand for goods and services. People will feel less secure if house prices fall and it will be unlikely that banks and building societies will loan money to people to buy houses.

The housing and construction industry are linked together because when houses are being built, they are done through their construction. Less people would want to move houses or buy a house if the house prices has declined. If people lose confidence on spending and affects the demand for goods and service, Decrease in the demand of houses will affect the construction industry. All construction related industries will be affected if demand for the construction of house or buildings declined because the owners of the builders or houses are trying to cut costs.

If there was a decline in manufacturing, it could affect a number of different ways in the UK economy. Foremost if manufacturing companies decrease cost, it is likely that workers might face redundancy and could lead to loss skills in the industry which rises the percentage of unemployment in the UK. Decrease in demand for products and service across the economy is likely to happen. The balance of payments will be affected if there is a reduction in goods to sell for export, it will be affected by making it even more negative. The goods will need to be imported if the manufacturers can’t produce the goods in UK. Importation will affect the balance of payments negatively. Foreign investors will see an opportunity to invest in new processes and equipment if the manufacturing in the UK declines. This could lead to weakening the value the UK pound.

In figure 38.8 shows the changing structure of the UK economy between 1970-2006. The figure shows that services has massively increased in 2006 since 1970 compared to manufacturing when comparing gross value added. It is contribution of each producer, sector or individual makes to the UK economy. Since 1970, more output and employment comes from services industries as the amount of manufacturing has declined.

Figure 38.9 shows the overall GDP, Services output, construction output and manufacturing output. The graph shows that manufacturing and construction industries dropped rapidly since 2003 and services industry increased significantly, the figure is showing the yearly estimate of the output of the construction, services and manufacturing industry in both the private and public sectors. The estimates are an important component of Gross Domestic Product. The GDP in figure 38.9 is showing the health of a country’s economy. 2003 to 2008 the GDP was increasing significantly, higher GDP can lower unemployment, rise stock prices and create a sense of well-being in the UK, however approximately mid-2008. The GDP started to decrease.

The company I will use is BMW. Slump is a period when output slows down due to a reduction in demand, this might happen because few people may want to buy from BMW which means BMW will reduce their productions and in result to this, sales will decrease. Recession. During this period, BMW would cut back on production and they may also go bankrupt. Consumers spend less money, Individuals may lose their jobs and prices will start to fall. This will lead to a rise in unemployment and Firms losing the confidence and reduce investment. Individuals may save rather than spend. Recovery is when BMW moves between recession and a boom. Their sales starts to increase and their employment levels start to increase. Boom is a period when the economics is growing and it grows very fast and the employment levels are very high and the unemployment levels are low. BMW’s confidence becomes higher and consumer confidence may lead to extra sending on items. GDP is important for policy makers and central banks, it enables them to judge whether the economy needs a boost or restraint, and to see if a threat such as a recession could occur. Steady growth in the GDP leads to extra earned income which leads more buyers of cars which is beneficial for BMW. The sales of goods and services would rise when the inflation is high. Consumers will be unable to buy cars as they might not afford it. They might also refuse to take out loans because they might not have the money to pay the it back. High inflation can be difficult for those workers whose incomes don’t keep up with rising prices.
Ripple effect, a decline in manufacturing will affect BMW and the balance of payments. If there is a reduction in goods to sell for export, it will be affected by making it even more negative. BMW will need the goods to be imported. If the BMW can’t produce the goods in UK. Importation will affect the balance of payments negatively.

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