Impact Of Slowdown In UK GDP On Trade, Employment, And Current Account Deficit

Less Productive Countries cannot Expect Benefits from International Trade

Describe about the Slowdown in UK GDP?

In the given statement it is argued that when a nation is found to be less productive in manufacturing everything, it is anticipated that the country will not enjoy significant advantages from the international business. In this section, this statement will be analyzed. In order to answer this question it is important to assess the reason behind engaging into international trade. When two countries have some difference in operation, infrastructure and efficiency, they decide to enter into an international trade agreement. The theory of David Ricardo states that two nations get involved into trade operations in order to gain advantage from the differences. In these cases each country has specialized in a particular good or service which is offered to another country which has not reached that efficiency. Hence, one of the major reasons behind international trade is to achieve economies of scale in the production procedure (Mankiw, 2007).  According to this theory, it can be argued that each country specializes in producing at least single product and therefore it needs to produce that good in abundance so that it can be supplied or traded with the country which lacks expertise in the production procedure of that particular good. It has been observed that when a nation has a comparative advantage in producing goods, the opportunity cost is estimated to be low in the production procedure. An example can be cited here to explain the reason of international trade. The garment industry of Bangladesh accounts for 78% of the total export of the nation (Bangladeshaccord.org, 2015). The readymade garment industry of Bangladesh has been successfully conducting international trade with European markets and US. The cost of lab our is significantly low which provides competitive advantage to Bangladesh and it is capitalized by the countries having high wage rates such as US, UK, Germany etc.  Hence, the country which is less productive in every aspect, cannot expect to have advantages or gains from international trades.

The question states that low economic growth has a significant association with increasing unemployment. This section has focused on explaining why low economic growth has contributed to rising unemployment rate in an economy. This trend can be explained with the aid of Okun’s Law.  This law has established a relationship between the growth rate and unemployment rate of en economy. It is evident that all the nations aim to achieve high economic growth rate and lower unemployment rate. Economic growth rate is estimated by gross domestic product or the output of an economy. It has been found that the output of a nation is significantly reliant upon the amount of labor used during the production procedure. It is evident that a positive relationship exists between the output and employment of en economy. Greater output level indicates greater employment rate s more number of labor must be engaged to produce more output (Eßlinger and Wienert, 2013). On the other hand, increasing output indicates lower unemployment rate. Hence, there is a negative association between the economic output and the unemployment rate. The Okun’s law can be applied in this section in order to explain the given statement. Lower economic growth clearly indicates that the output of the economy is low and consequently the need for labor is also low. In this case, it is obvious that the rate of unemployment will increase. Hence, it can be stated that lower economic growth leads to higher unemployment rate.

Low Economic Growth Rate leads to High Unemployment Rate

Government policies play a crucial role in managing the economic growth in the nation. In case of United Kingdom, it has been reported that for the first three months of 2015, the economy has been growing at the rate of 2.4%. The economic slowdown is led by significant fall in the construction, manufacturing, mining and service industry. In 2014, the economy of UK encountered slight improvement that can be explained by saving less by the consumers along with the loosening of the fiscal policy. The general election of May has created some uncertainty for the political and economic situation of the country. The government of UK has been focusing on enhancing the growth rate of the nation through various policies (Gov.uk, 2015). Economic growth will help in improving the level of consumption along with the increase in tax revenue. It is evident that the uncertain political environment due to the upcoming general election will affect the confidence of the investors (Farrell, 2015). Moreover, it has been argued that the financial market of UK will encounter financial market stress if the interest rate is increased by United States. The geopolitical risk has significant potential to pose a threat to international stability (Allen, 2015). Hence, the government will face difficulty to attract investments that is essential for boosting the economy. Additionally, it has been found that increasing the output of the manufacturing and mining sector will assist in recovering the economic growth. However, it has been found that increasing level of output will lead to high level of pollution by emission of hazardous gases. Therefore, it will be accountable for leading to negative impact on the environment. High economic growth has a potential to lead to high level of inflation. Thus, the UK government will encounter various issues regarding boosting the economic growth.

The current account deficit of United Kingdom is a major concern for the nation. Current account deficit in the balance of payment indicates that cash has been draining out of the nation. It is posing a threat to the financial stability of the nation. In the last quarter of 2014, current account deficit was estimated to be 5.6% of the GDP (Spence, 2015). Earlier, the net investment of UK was positive as more number of foreign investors invested in the UK market (Tradingeconomics.com, 2015). Presently, the scenario has been reversed and it has been found that net investment has become negative in UK which is accountable for outflow of money from the nation. In this case, it is evident the value of imports has been larger than the value of exports. Reducing the value of currency will be an effective policy to manage current account deficit in UK (Arslan, Kılınç and Turhan, 2015). Apart from this, deflationary policy will be effective in reducing the current account deficit the government must tighten the fiscal as well as monetary policy for reducing the aggregate demand in the economy. Thus the disposal income can be reduced and consumption of imported goods can be controlled. Hence, the high level of marginal propensity will contribute in reducing the aggregate demand and current account deficit (Edwards, 2004). It will also impose pressure on the manufacturer to reduce cost that well in gaining advantage in exporting goods which will subsequently increase. Secondly, protectionism will help in managing current account deficit by enhancing the tariffs that will reduce the imports.

Difficulty Encountered by UK Government in Boosting Economic Growth

According to the economists and the policymakers, the economy of UK can be rebalanced as well as boosted with the aid of increase in UK trade with the rest of the world. The economic performance of UK is significantly reliant upon the export and import of the nation. Due to higher consumer spending on imported goods, the value of the imported products has exceeded the value of exported goods and services. It has led to current account deficit. It has been observed that increasing export will help in enhancing the foreign currency inflow that helps in boosting the economic growth of nation (Cadman, 2014). On the other hand, reduction in import will control the excessive cash outflow from the economy (Mankiw, 2007). Thus, the balance of payments can be positive which is important for reviving the UK economy.

Several people said that termination of monopoly in the telecommunication sector of UK has been beneficial as it has enhanced the competition in the market. On the other hand, it has been observed that monopoly has delivered good results in case of the railways of Britain. In the telecommunication sector of Britain, the competitive market has offered wide range of options to the consumers. Earlier, it has to avail the price and service offered by British telecommunication. BT used to set the price of the services and the consumers has no other option. End of monopoly in the British telecommunication sector has provided wide range of benefits through extensive competition that enhanced the quality of service and offered competitive pricing and consumers are better off (McTaggart, Findlay and Parkin, 2012). On the other hand, the railway sector of Britain has retained the monopoly and it has been also providing good service to the consumers. It provides lot of benefits to the consumers and in this case it is recommended that the monopoly must not be replaced by some competing firms.

References

Allen, K. (2015). Slowdown in UK GDP: what the economists say. [online] the Guardian. Available at: https://www.theguardian.com/business/2015/jan/27/slowdown-in-uk-gdp-what-the-economists-say [Accessed 11 May 2015].

Arslan, Y., Kılınç, M. and Turhan, M. (2015). Global imbalances, current account rebalancing and exchange rate adjustments. Journal of Policy Modeling, 37(2), pp.324-341.

Bangladeshaccord.org, (2015). Bangladesh’s Garment Industry | The Bangladesh Accord. [online] Available at: https://bangladeshaccord.org/bangladesh/ [Accessed 11 May 2015].

Cadman, E. (2014). UK current account deficit hits joint record. [online] Financial Times. Available at: https://www.ft.com/intl/cms/s/0/fba2d2fc-8b5c-11e4-be89-00144feabdc0.html#axzz3Zngg4OJM [Accessed 11 May 2015].

Edwards, S. (2004). Financial Openness, Sudden Stops, and Current-Account Reversals. American Economic Review, 94(2), pp.59-64.

Eßlinger, V. and Wienert, H. (2013). Okun’s Law. WIST, 42(4), pp.192-196.

Farrell, S. (2015). Bank of England warning over current account deficit. [online] the Guardian. Available at: https://www.theguardian.com/business/2015/apr/07/bank-of-england-warns-on-risks-from-current-account-deficit [Accessed 11 May 2015].

Gov.uk, (2015). 2010 to 2015 government policy: economic growth in developing countries – GOV.UK. [online] Available at: https://www.gov.uk/government/publications/2010-to-2015-government-policy-economic-growth-in-developing-countries/2010-to-2015-government-policy-economic-growth-in-developing-countries [Accessed 11 May 2015].

Mankiw, N. (2007). Macroeconomics. New York: Worth Publishers.

McTaggart, D., Findlay, C. and Parkin, M. (2012). Microeconomics. Frenchs Forest, N.S.W.: Pearson.

Spence, P. (2015). Why the UK’s ‘other deficit’ has economists scared. [online] Telegraph.co.uk. Available at: https://www.telegraph.co.uk/finance/economics/11532598/Why-the-UKs-current-account-deficit-has-economists-scared.html [Accessed 11 May 2015].

Tradingeconomics.com, (2015). United Kingdom GDP Annual Growth Rate | 1956-2015 | Data | Chart | Calendar. [online] Available at: https://www.tradingeconomics.com/united-kingdom/gdp-growth-annual [Accessed 11 May 2015].