Case Study On Economics For Business In Macroeconomics

Measurement of UK’s Economy

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1. The main objective of the study of macroeconomics is to measure the size of the whole economy. How large is the UK economy is can be measures by the gross domestic product (GDP) (Abel, Bernanke and Croushore, 2011). Apart from that, the word gross domestic product refers to the value of all the services and final goods in a country in a particular time period. Every market transactions are included in the GDP. The market transactions include both the transactions from consumer and the sellers. The Gross Domestic product or GDP is measured by the market value of the total purchase in UK in a particular year or the market value of the total production in UK in a particular year.

The United Kingdom (UK) is getting position of the fifth nationwide economy and the second largest in the Europe. This has been measured by the nominal Gross Domestic Product. Ninth largest economy in the World and the third largest in the Europe and this have been concluded by PPP or the purchasing power parity (Abel, Bernanke and Croushore, 2014). UK was the in the ninth largest position in the exporter countries in the world in 2014. UK is the most globalized economy in the world. In the economy of UK, the service sector plays a dominant role. The service sector in UK contributes around 78% in the total GDP. London is the largest financial center in the world. So, the financial service sector is very significant in the UK economy.

Economic growth is nothing but the increase in the market value (inflation adjusted) of all the services and goods produced in a country in a particular or specific period time. The economic growth is generally measured by the percentage increase in the GDP or the gross domestic products. It is also measured by Gross Domestic Product per capita or per capita income level. A rise in the per capita Gross Domestic Product or per capita income indicates the growth in the economy. An economic growth can be happened by the efficient usage of the resources available in the country (Blanchard, 2010). Economic growth is generally measured in the real terms rather than in the monetary terms. So the indicator of the economic growth is generally inflation adjusted.

Measuring the economic growth level is a very important thing (Clarida and Giavazzi, 2011). The measurement of economic growth always shows the condition as well as the economic situation of a country.

UK’s Position in the World Economy

The economic growth measured by the demand side of the GDP. The demand side of GDP consists of four components, such as consumption or consumer spending, investment or business spending, government spending or government expenditure and spending on net exports(Colander, 2013). The resource exploration also has negative effect on the environment. The exploration process pollutes the air. So there occurs air pollution. The processing of oil also affects the air as well as water badly. So many pollutes are spreading in the air as well as water.

The household of a country conducts the consumption expenditure. The consumption expenditure occupies the greatest portion in the GDP. The consumption expenditure accounts for two third of the total GDP in the country UK. So this reveals that the decision play a significant role in the economy(Dornbusch, Fischer and Startz, 2014). The consumer spending is called as a gentle elephant as it does not leap up suddenly. It is generally viewed over the time period.

The investment expenditure includes the expenditure involved in the purchase of the equipment and the physical plant required for the business. If any business organization is expanding, such as opening of new stores or new technologies or new machinery, then the investment expenditure takes place(Frankel and Pissarides, 2012). The investment expenditure takes about 15 % to 18 % of the total GDP level. But this is very important or very significant for the expansion of the overall economy as it creates new employment. The investment expenditure fluctuates more than the consumption expenditure. The investment of the business organizations are too much volatile, so the investment expenditure also very volatile. It is not certain that in every year, there will take place several new technologies or opening up of new stores. So the investment is not the same in every year.

If the government wants to launch any social spending then it will be included in the government expenditure (Gärtner, n.d.). In UK it is about 20% of the total GDP. The government spending consists of several levels of government, such as local, state and federal. If the government takes upon a project for social welfare, that will be included in the government expenditure. Some example can be given here to elaborate the concept, for example, construction of new bridge, highways, airports etc. in the demand side of the GDP includes the purchases conducted by the government. Vital parts of the budgets of Government are several transfer payments, such as unemployment benefits, social security given to the retirees and veteran’s benefits. These expenditures that is the transfer payments are expelled from GDP as the government does not obtain any new good or service in exchange (Gordon, 2012).

Economic Growth

In this section the demand for the domestic goods in the global are to be discussed. To do this, it should be taken into consideration that the goods produced domestically have been sold in the abroad. This means the exports of the country. It should also take into account the imports that mean the goods and services purchased by UK from the rest of the world. The value of spending on import has to be subtracted (Gottfries, 2012).  This can be counted by the net exports (NX). The net exports are calculated by gap between the total export and the total import. Symbolically, NX = (X – M). This gap is generally known as the trade balance. If the exports of a country are greater than the imports then there exists trade surplus. On the hand, if imports are greater than the exports then there exists trade deficit.

There are five categories of the goods and services in the GDP. Those are, namely durable goods, nondurable goods, inventories, structures and services. The durable goods are referred to those goods which have a long longevity(Hubbard and O’Brien, 2010). Some examples are car, house, machineries etc. The nondurable goods are those goods which have a small life span. Some examples of nondurable goods are food, clothing etc. The structure includes the housing, buildings, factories malls etc. Inventories are defined as the commodities that are created by one industry but not yet sold to customers. The services include several services sold in the market, such as the service of doctor, nurse, legal advocate etc. The component service takes a major part in the GDP of UK.

There are several problems involved in the measurement of GDP. () argued that GDP is defined as the current market value of entire services and goods that produced in the country especially in United kingdom in a time. The concept of final goods and the intermediate goods are very confusing (Hubbard and O’Brien, 2013). The final goods are those, which are taking into the market for sale. On the other hand, the intermediate goods are those goods, which are used in production process of the other goods. Now, the confusing part is that, the final good of a company is used as intermediate good of the other company. So there arises a problem of double counting.

To avoid the problem of double counting, the statisticians always takes into account the final goods and services. The statisticians of government takes into account the value of the final product or services in a production chain, which are sold in the market for consumption. Those goods, which are used in the production chain are intermediate goods and excluded from the calculation of GDP(Hubbard, O’Brien and Sharma, 2012).

Measurement of Economic Growth

Here is a tabular form of what is included and what are excluded in the counting of GDP.

Counted	not included
Consumption	Intermediate goods
Government spending on goods and services	Illegal goods
Business investment	Used goods
Net exports	Transfer payments and non-market activities

There are also some other measures for the measurement of the economic growth. Those are as follows: Net National Product (NNP), Gross National Product (GNP), etc. These concepts are discussed here in this section (Jones, 2010).

The gross national product (GNP) includes the goods and services produced within a country subtracted from the foreign transactions or transaction to the abroad (Krugman and Wells, 2013). This can be shown by the following formula:

GNP = GDP – Foreign transaction

Net national product is calculated by the subtracting the depreciation from the GNP. (Krugman and Wells, 2012)

This can be shown by the following formula:

NNP = GNP – Depreciation

2: There are two tools for determining the economic growth, such as fiscal and monitory policy. When used properly, they can have alike consequences in both inspiring economy and slow it downward when it warmth up (Mankiw, 2010). The continuing deliberate is that, which one is extra effectual in the long run as well as in the short run.

Fiscal policy is used by the government. The government comes forward to solve any economic problem is called fiscal policy. The government may spend or tax to effect any problematic situation in the economy and correct it accordingly (Mankiw, 2013). The interaction and the combination of the revenue acquired by government and the government expenditure bring about delicate balances in the economy. The fiscal policy, direct or indirect, has several effects on the personal spending, capital expenditure, deficit levels, exchange rate, interest rates etc.

Fiscal policy is actually connected with the Keynesianism. An economist belonged to Britain named John Maynard Keynes had discovered the fiscal policy. The fiscal policy is used to expand as well as to contract the GDP level. There are two types of fiscal policies, such as expansionary fiscal policy and the contraction fiscal policy. The fiscal policy has several positive effects on the economic situations (Mankiw, 2012). The government has several operations for the running of the fiscal policy. The expansionary fiscal policy is when the income or the GDP rises and the rate of interest also rises. On the other hand, the GDP will fall and the rate of interest will also fall with the working of the contraction fiscal policy.

This policy is actually the decision of the government regarding the taxing as well as the spending. When the government is willing to encourage the growth of the economy as a whole, the government will raise the spending(Marjit, 2011). That will cause a rise in the demand for goods as well as services. As the demand for the goods and the services have risen, the production will rise. Now, if the production is stimulated, then the employment rate will rise accordingly. As the employment rises, the money in the hand of people will rise, that means the income level will rise. This will again stimulate the demand. In this way, the process works. The cycle will hopefully go on and the economic growth will continue. This means that the increase in the government spending actually speed up the growth of the whole economy (Marjit, 2011).

Components of GDP

Now, if the government decides to slow down the economic growth, then it will take contraction method of fiscal policy. The government notice that the economy is growing faster than it desires to be, then the government will decrease the spending level. As the government decreases the spending, then the demand for the goods as well as the services will fall. As the over all demand for goods and services falls, the production will slow down. As the production slows down, the investment will automatically fall. The need for the workers in the companies will fall, so the employment rate will decrease (McTaggart, Findlay and Parkin, 2012). This decline in the employment will result in the money income. Money in the hand of people will decline accordingly. Then the demand for goods as well as the services will fall.

Another side of the fiscal policy is the taxes. If the government wants to speed up the economic growth, then the government will tend to decrease in the tax. If the tax rate declines, then there will be money in the hand of the producers (Parkin, n.d.). This will stimulate the employment as the extra money in the hand of the producer will encourage in new recruitment. Thus the employment rises and the income level will also rise as well. As the income rises, the money in the hand of people will rise. This will stimulate the demand for the goods and services. So the economic growth rate will rise. On the other hand, the contraction fiscal policy suggests to raise in the tax rate. The employment will fall, income level will fall. So the demand for goods as well as services will fall. The production will fall and this will result in the low growth rate in the economy (Samuelson and Nordhaus, 2010).

According to some economists, the fiscal policy creates a crowding out effect in the economy. When the government has shortage of money to invest or shortage in the revenue for the purpose of spending, then the government has to borrow money to meet up the requirements of the country. Some economists say that the borrowing will raise the rate of interest. The increase in the rate of interest discourages the private investment. So it is generally said that the government spending has crowded out the private investment (Williamson, 2011).

The central bank is the parent institution of the monetary economy in any country. The monetary policy is taken by the central bank of a country. Monetary policy is concerned with the monetary phenomena. The monetary policy works by increasing or by decreasing the money supply. There are many objectives of monetary policy(Williamson, 2014).

Problems in GDP Measurement

The main goal of the monetary [policy is to sustain the full employment level in the economy.

The second goal of the monetary policy is to sustain stability in the price level(Williamson, 2014).

Stimulating the economic growth is the third objective of the monetary policy

Since 1950, the monetary policy is maintaining the equilibrium in the balance of payment.

There are several instruments of the monetary policy, such as bank rate operations, open market operations, changes in the reserve ratio and the selective controls in the credit (Samuelson and Nordhaus, 2010).

Bank rate is actually the rate at which the commercial banks borrow from the central bank. The bank rate is the lowest rate of lending of money from the central bank to the commercial bank. The central bank fluctuates in the bank rate to influence the money available to the commercial bank as well as in the market (Abel, Bernanke and Croushore, 2011). The private investors borrow from the commercial banks. If the bank rate is high, then the rate of interest will also be higher. The investment will fall. Then the demand for goods and services will fall. The economic growth rate will fall. On the other hand, if the investment rises due to fall in the bank rate and thereby the fall in the rate of interest, the employment rate will rise accordingly. Then the level of income will rise. The demand for goods and services will rise(Abel, Bernanke and Croushore, 2014).

The open market operation includes the purchase and sales of several securities and bonds, which are marketed by the central bank. The central bank use to sale several securities and bonds to the public. There is a rate of interest written on it. The purchaser of the bond will paid the money back with the interest rate written on it. (Blanchard, 2010) Now, the interest rate has a significant role on the purchase or sale plans of the securities. If the demand for bond will rise, then the price of the bond will fall. Then the rate of interest will rise. This occurs with the formula, r = 1/ P, r is the rate of interest and the P is the bond price. If the rate of interest falls, that will affect the investment adversely. Employment will fall and the income will fall. On the other hand, if the investment rises due to fall in the price of bonds and thereby the fall in the rate of interest, the employment rate will rise accordingly. Then the level of income will rise. The demand for goods and services will rise(Clarida and Giavazzi, 2011).

Another instrument of the monetary policy is the change in the reserve ratio. The reserve ratio is the rate at which the commercial banks had to keep with the central bank. If the reserve ration rose, then the commercial banks have to keep more money with the central bank. Thus the quantity of money in the market will fall. Then the rate of interest will rise. Investment falls as a result of the increase in the rate of interest (Colander, 2013). Employment will fall and the income will fall. On the other hand, if the investment rises due to fall in the reserve ratio and thereby the fall in the rate of interest, the employment rate will rise accordingly. Then the level of income will rise. The demand for goods and services will rise.

The selective credit control takes place in the case of speculative purpose. When the speculative activities rise, then the price of that particular commodity will rise. (Dornbusch, Fischer and Startz, 2014)

But it has been conventional by all financial theorists that the achievement of monetary policy is zero in a depression. Secondly, it is victorious against price rises. The monetarists compete that as in opposition to fiscal policy as well as the monetary policy acquires superior suppleness and it can be put into practice rapidly (Frankel and Pissarides, 2012).

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