Choose a Country and intro the Economy Real GDP, GDP growth rate, Real GDP Capita analysis Define and explain how each indicator measures performance of the Economy.
The United Kingdom (UK) economy ranks fifth as appraised by nominal GDP and ninth as accounted by GDP per capita in the globe. UK’s service sector contributes to around 80% of total GDP in the economy. In addition, the aerospace, pharmaceutical and financial services industry plays a crucial function in contributing growth of this nation. The UK’s GDP increased at lower rate by around 0.2% between 2016 and the first quarter of 2017. The growth of UK’s GDP slowed down due to fall in retail and manufacturing industries, but the manufacturing and finance industries continues to grow at a higher rate. Another indicator that slowed this economy’s growth is inflation rate that rose by around 2.6% in 2017. Besides, the rate of unemployment in UK falls to 4.5% in 2017 from the previous year, which was 4.9%. This report reflects on how the macroeconomic indicators including GDP growth, rate of unemployment and inflation impacts on the country’s economic performance (Antal and Van den Bergh, 2013). Furthermore, UK’s economic performance trend over the years has been discussed in this report. In addition, measures adopted by the UK government for achieving production output, full employment and stable price are also highlighted in this report.
Analyzing growth rate in UK economy
GDP is termed as the total value of products produced within the geographical border over a certain period. Real GDP is one of the macroeconomic indicators that measure the economic output value with respect to its change in price (Argy, 2013). GDP per capita measures the economic output of nation that deems on respective countries GDP with respect to its entire population. However, rise in per capita GDP signals improvement in living standards and productivity. Respective nation’s government uses this indicator for analyzing the purchasing power and growth of the economy. Growth rate in real GDP determines the change in economy’s GDP in terms of percentage over the years.
Macroeconomic indicator determining UK’s economic performance
The countries consider real GDP as a good index in determining its performance as it involves the fluctuating product value expressed in terms of money (Chaiechi, 2012). However, it gives an idea about the total output of the nation with decrease in distortion because of certain factors including inflation and fluctuations in currency rate. Real GDP per capita is mainly adjusted for rate of inflation for determining the workforce productivity of the nation (Nalewaik, 2012). On the contrary, this indicator does not consider technology influence over the production output. Hence, these indicators help in comparing the countries production output and forecasting recession in an accurate manner.
UK economy’s performance trends
Recent data reflects that per capita GDP in UK in the year 2016 was 40,096 and 37,813 in the first quarter of 2017. This highlights on the fact that the GDP of this economy declines by 5.69% in the present year. The UK’s real GDP growth rate averaged to 0.61% over the years. The service and retail sectors of UK contributed mainly to this slow GDP growth of UK (Denis and Kannan, 2013). This sector increased by 0.8% in 2016 but in the first quarter of 2017 the growth slowed down to 0.3%. In addition, UK’s production sector has reduced to 0.4% in quarter 2 of 2017 from the previous year. Moreover, the deceleration in the above sectors occurred due to increase in prices. After Brexit, the currency value of UK decreased by nearly 15% to 20%. However, the GDP in UK showed a reduction of 0.7% from 2016 to 2017 and this reflects a downward trend of the nation’s current performance. The statistic reflects that real GDP growth rate increased every year except during recession phase. Thus, during this period the UK’s GDP decreased by 4.3%, although in the year 2014 the GDP growth rate peaked to 3.1%.
Figure 1: GDP PER CAPITA TREND IN UK FROM 2007-2017
Source: (Author’s creation)
Figure 2: GROWTH RATE OF REAL GDP IN UK FROM 2007-2017
Source: (As created by author)
Measures adopted by UK government for achieving production output performance
Productivity is a vital determinant of long- term nation’s growth rate. Productivity has a direct connection with the country’s living standards. However, increase in growth of productivity improves the nation’s living standards. This leads to the stronger growth of country’s GDP, which in turn decreases the budget deficit of the government and raises the tax revenues. UK’ s production output has stagnated since recession (Martin and Milas, 2013). In 2017, the production output level has been recorded to around 0.4% low, as it was earlier in 2007. The annual productivity growth rate of this economy in 2017 estimated to around 0.3%. Due to this low productivity level, the UK’s government adopted certain measures in order to improve production output performance.
The government of UK has designed 15-point plan of productivity for boosting nation’s productivity in future. They also proclaimed four-year commitment with the NPIF( National Productivity Investment Fund). Moreover, UK‘s government has implemented new industrial policies that includes that the market cannot fully dictate economy’s industrial structure (Rots and Maduko, 2014). The 15 measures that UK’s government has adopted for designing the productivity plan are:
Unemployment trends based on Unemployment rate
Rate of unemployment refers to the jobless workforce percentage divided by total people in the workforce. Unemployment rate is considered as the lagging indicator and increase or decreases according to the economic conditions. Rate of unemployment and GDP growth of an economy is inversely related to each other. This means that increase in unemployment rate leads to fall in country’s GDP growth rate, which is stated by Okun’s law (Levine, 2012). In addition, unemployment trends also depend on the economy’s rate of inflation. Therefore, Phillips’s curve states that unemployment rate and inflation are inversely correlated.
The UK’s unemployment rate in 2017 fell to 4.5% from the previous year that accounted to 4.9%. Previous record reflects that UK’s unemployment rate remained stable over the 10 years. UK’s unemployment rate averaged to 7.10% over the years and this affected the GDP growth of the economy. Moreover, the decline in rate of unemployment resulted to increase in employment rate in the country. Therefore, decrease in unemployment rate enhances the UK real GDP growth rate.
Figure 3: UK UNEMPLOYMENT RATE TREND FROM 2007-2017
Source: (As created by author)
Types of Unemployment in UK economy
Unemployment is basically divided into three parts namely structural, cyclical and frictional unemployment.
Cyclical unemployment- It occurs when the goods overall demand in the country cannot bear full employment (Weale, 2015). The laborers become jobless due to depression in business cycle. However, as the output of the economy decreases, the business cycle declines and hence cyclical unemployment increases.
Frictional unemployment- This situation results from turnovers in the labor market. It mainly occurs during the period when the employers are in search for jobs or transit in another job. Moreover, if the economy penetrates into phase of recession, frictional unemployment tends to reduce. It mainly exists in the country as disparity occurs between laborers and job.
Structural unemployment- In this case, the rate remains high even after the recession period. Structural unemployment takes place due to advancement of technology and unskilled workforce in the industry (Mankiw, 2014). As the unskilled workers are unable to adopt the new technology, retrenchment takes place in the firms.
Cyclical unemployment occurred in UK during the recession period. During this phase, the countries real GDP fell and production output of the firms also lowered. As a result, there occurs a decline in demand for laborers. Frictional unemployment always exists in UK as the individual’s takes time in finding jobs. In addition, youth unemployment also exists in UK because of lack of skilled workers.
Measures taken by the UK government for achieving full employment
UK government have introduced Work program for replacing the schemes and projects of employment. It helps in providing personalized support to the applicant who in search for job. The government of UK also implemented Help to Work for those individuals who have done the work program and are still searching for job (Mishkin, 2012). The work coaches aid the individuals in knowing their needs and helping them to find the job and design their work plan. UK’s government facilitates Youth in finding jobs through the introduction of Youth contract. This contract gives opportunities to the young people that include apprenticeships. They have also introduced ‘Work Choice’ program for assisting the disabled people finding their jobs. The government adopted new policies for the older individuals who like to continue with the job even after retirement.
Trends of Inflation based on Inflation rate
Inflation occurs in an economy when the product price level rises and accordingly the currencies purchasing power falls. The Central Bank of every nation tries to bound inflation rate and evades deflation for keeping the economy running in a smooth way. The inflation rate of the nation is basically determined by consumer price index (CPI) that helps in tracking products prices over a particular period (Bils et al., 2012). The inflation trend in UK remained at steady level over the last ten years except in the year 2008 and 2011. The present inflation rate of UK accounts to 2.7%, which is quite high as compared to 2016 that recorded to1.6percentage.
Figure 4: UK INFLATION RATE TREND FROM 2007-2017
Source: (As created by author)
Explaining types and cause of inflation
Inflation in economy is mainly classified into two parts namely demand-pull and cost-push inflation. Demand –pull inflation arises when nation becomes nearer to full employment. Therefore, rise in economies aggregate demand leads to rise in product price level. However, it occurs due to trend in long run growth rate in the economy (Davig and Doh, 2014). Cost-push inflation occurs due to various factors that includes- increase in wages, prices of imports and raw material, low productivity and rise in taxes. In 2012, this economy has experienced increase in cost-push inflation because of currency depreciation against Euro.
Cause of inflation in UK economy
In this year, this nation has experienced rise in force of cost-push inflation. Despite low growth of the economy, this occurred due to rise in inflation rate (Galí, 2015). In addition, the factors that affected cost-push inflation are Sterling devaluation and increase in petrol prices. In 2017, the CPI level in UK recorded above the target level of 2% inflation rate.
Government measure for achieving stable price
Price stability is considered as the macroeconomic goal in stimulating the development of the economy. The monetary policy facilitates in keeping the price level stable (Mahadeva and Sterne, 2012). The central government of UK adopted certain macroeconomic policies for reaching the monetary equilibrium. The UK’s government tries to keep the inflation rate below the target level that is 2% as it impacts on the performance of the economy. Moreover, the government tries to keep the interest rate high because this reduces the consumers saving. As a result, this pushes the products price level down and regulates the rate of inflation in the country.
Conclusion
It can be concluded from the above study that the health of every nation mainly depends on the macroeconomic indicators discussed in the above report. The present state of the UK nation highlights that growth rate of both real GDP and per capita GDP decreased from the last year. In 2017, the rate of inflation in UK increased from the preceding year and is above the target level, which is 2%. Although this nation’s unemployment rate in 2017 declined from the last year, the GDP growth rate increased by small rate. However, the UK government implements certain monetary policies to achieve full employment and stability in price level of the country. Thus, the government of this economy has adopted few measures for improving the health of the economy that was affected during the recession period.
References
Antal, M., & Van den Bergh, J. C. (2013). Macroeconomics, financial crisis and the environment: Strategies for a sustainability transition. Environmental Innovation and Societal Transitions, 6, 47-66.
Argy, V. (2013). International macroeconomics: theory and policy. Routledge.
Bils, M., Klenow, P. J., & Malin, B. A. (2012). Reset price inflation and the impact of monetary policy shocks. The American Economic Review, 102(6), 2798-2825.
Chaiechi, T. (2012). Financial development shocks and contemporaneous feedback effect on key macroeconomic indicators: a post Keynesian time series analysis. Economic Modelling, 29(2), 487-501.
Davig, T., & Doh, T. (2014). Monetary policy regime shifts and inflation persistence. Review of Economics and Statistics, 96(5), 862-875.
Denis, S., & Kannan, P. (2013). The impact of uncertainty shocks on the UK economy.
Galí, J. (2015). Monetary policy, inflation, and the business cycle: an introduction to the new Keynesian framework and its applications. Princeton University Press.
Levine, L. (2012). Economic growth and the unemployment rate.
Mahadeva, L., & Sterne, G. (Eds.). (2012). Monetary policy frameworks in a global context. Routledge.
Mankiw, N. G. (2014). Principles of macroeconomics. Cengage Learning.
Martin, C., & Milas, C. (2013). Financial crises and monetary policy: Evidence from the UK. Journal of Financial Stability, 9(4), 654-661.
Mishkin, F. S. (2012). Macroeconomics: Policy and practice. Pearson Education.
Nalewaik, J. J. (2012). Estimating probabilities of recession in real time using GDP and GDI. Journal of Money, Credit and Banking, 44(1), 235-253.
Rots, E., & Maduko, F. (2014). MACROECONOMIC THEORY I.
Tanveer Choudhry, M., Marelli, E., & Signorelli, M. (2012). Youth unemployment rate and impact of financial crises. International journal of manpower, 33(1), 76-95.
Weale, M., Blake, A., Christodoulakis, N., Meade, J. E., & Vines, D. (2015). Macroeconomic policy: inflation, wealth and the exchange rate (Vol. 8). Routledge.
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