CENTRE EXECUTIVE EDUCATION

U.K Economy
Business Environment
Ms. Rashida Yvonne Campbell
Contents
Mini-Project................................................................................................................................3

In your project answer the following questions........................................................................3

1. What kind of economy is the UK economy? Explain and mention the advantages and
disadvantages of its economic system.......................................................................................4

2. Is the UK economy developed or developing? If it is developed, what are the major factors
that contributed to its development? If it is developing, what needs to be done to
encourage development?..........................................................................................................6

3. What is the per capita income at the present?.....................................................................7

4. What is the rate of economic growth at the present? Explain..............................................7

5. At what phase of the business cycle do you think the economy is at the present and why?
....................................................................................................................................................9

6. What are the chances of long-term economic growth?......................................................12

7. Does the country have any unemployment problems? Explain..........................................14

8. Describe recent trends in the role and power of trade unions in the UK...........................15

9. What is the unemployment rate now?................................................................................16

10. Does the country have inflation problems? Explain..........................................................17

11. What is the inflation rate (or deflation rate)?...................................................................17

12. Discuss the infrastructure and its role in economic development....................................18

13. Discuss the recent social welfare and industrial policy in that country. What is their
impact on the economy?.........................................................................................................19

14. What is the present fiscal policy? How is fiscal policy affecting the economy? Do you
agree with that fiscal policy?...................................................................................................20

16. Evaluate the impact of the global economy on the UK economy.....................................22

Bibliography.............................................................................................................................23

References................................................................................................................................23

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Websites...................................................................................................................................23

Mini-Project

In your project answer the following questions

1. What kind of economy is the UK economy? Explain and mention the advantages and
disadvantages of its economic system.
2. Is the UK economy developed or developing? If it is developed, what are the major
factors that contributed to its development? If it is developing, what needs to be
done to encourage development?
3. What is the per capita income at the present?
4. What is the rate of economic growth at the present? Explain.
5. At what phase of the business cycle do you think the economy is at the present and
why?
6. What are the chances of long-term economic growth?
7. Does the country have any unemployment problems? Explain.
8. Describe recent trends in the role and power of trade unions in the UK.
9. What is the unemployment rate now?
10. Does the country have inflation problems? Explain.
11. What is the inflation rate (or deflation rate)?
12. Discuss the infrastructure and its role in economic development.
13. Discuss the recent social welfare and industrial policy in that country. What is their
impact on the economy?
14. What is the present fiscal policy? How is fiscal policy affecting the economy? Do you
agree with that monetary policy?
15. What is the present monetary policy? How is the monetary policy affecting the
economy? Do you agree with that policy?
16. Evaluate the impact of the global economy on the UK economy.

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1. What kind of economy is the UK economy? Explain and mention
the advantages and disadvantages of its economic system.

The United Kingdom (UK) is a major developed Capitalist economy (free market economy).
The British Economy is one of the most globalised economies in the world, the capital-
London is considered to be the largest financial centre in the world. The economy of the
United Kingdom of Great Britain includes the economies of England, Scotland, Wales and
Northern Ireland. Capitalism is an economic system in which investment in and ownership
of the means of production, distribution, and exchange of wealth is made and maintained
chiefly by private individuals or corporations, especially as contrasted to cooperatively or
state-owned means of wealth. Under a Capitalist society framework there exists little or no
intervention from the government (laissez-faire). The government relies on market forces to
operate through the price mechanism-forces of supply and demand.
However, Economists claim that no economy is totally “free,” hence some government
intervention is administered. The UK government interventions include public, merit and de-
merit goods and services such as: the National Health Service, Education, Defence, Policing,
Law, Churches, Parks, Street-Lighting, Garbage collection, tobacco and alcohol etc. (Health
and Education is also available via privately owned companies)
A Free Market Capitalist Economy creates advantages and disadvantages discussed below:

Advantages:
 Capitalist economies provide equal opportunity to individuals of the state. Wealth
and growth of the individual depends upon efforts and merit. Allowing members of
the society to adopt creative thinking and innovation, skills that are acquired by
entrepreneurs.
 There are no limitations to the amount of wealth and progression an individual can
accumulate.
 Rational self interest in market economies are also encouraged (allow freedom for
people to do what they want, make what they want, and, sell what they want to a
certain extent, this can also be described as being able to decide what is going to be
produced, how it is going to be produced and for   whom it is going to be produced).
 Market economies can adjust to change easily. If there is a demand for one thing,
companies have the ability to change what they produce instead of having to go
through too much government protocol first.
 Capitalist’s economies generate a vast variety of goods and services for consumers. If
there is a demand for a good or service, the demand will almost always be met.
 Free Market Economies operate highly competitive business environments.
Competition is one of the basic reasons why there are generally so many different

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 varieties of goods/services at competitive prices and high quality standards,
providing increased consumer choice.

Disadvantages:
 Entrepreneurs work harder and possess skills that other members of society do not.
They are able to build stronger positions of wealth. This will eventually lead to
inequality of wealth within the economy. There tends to be a rise in inequality as
benefits of capitalism are not equitably distributed. As wealth tends to redound to a
small percentage of the population, the demand for luxury goods is often limited to a
small percentage of the workforce, one of the main capitalism disadvantages.
 Another disadvantage of capitalism is that firms gain monopoly over power in a free
market allows and exploit customers by charging higher prices. They often pay lower
wages to workers. Example: The London Underground once privatised created
phenomena, initially the employees experienced low wages which caused them to
participate in active striking, and London Underground increased wages and also
increases ticket prices yearly.
 Immobility of resources are one of the main problems of capitalism is that a free
market is supposed to be able to easily move factors of from an unprofitable sector
to a new profitable industry. However, this is much more difficult practically.
 Inequality of wealth in a truly Capitalist society with no Government welfare great
poverty is bound to occur. Leading to homelessness etc.
 Lack of Government intervention (except to prevent monopolies from occurring),
some companies can dominate the industry. If you take a look at Wal-mart, you see
that Wal-mart dominates a lot of the USA industry. They have also driven out a lot of
small business and perpetually dictate what goes on. Wal-Mart has managed to cut
out smaller shops and stores by maximising on its economies of scales. Large
companies have the ability to sell items at a loss until they dominate the market
share of customers and this pushes out smaller competition.
 Circular flow of income remains concentrated in a few hands and has limited
circulation for the benefit of all; the downtrodden masses remain dependent on the
"trickle down" effect.
 Capitalism is an inherently expanding social order in which the goals and powers of
profit-seeking private investors are the most important force shaping society; this
could be the reason for the loss of extended families and the creation of nuclear
ones. As people focus primarily on work and move locations to progress in their
careers and materialistic lifestyles.

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2. Is the UK economy developed or developing? If it is developed,
what are the major factors that contributed to its development? If
it is developing, what needs to be done to encourage
development?

The term developed country is used to describe countries that have a high level of
development according to some criteria. Which criteria and which countries are classified as
being developed, is a contentious issue and is surrounded by fierce debate. Economic
criteria have tended to dominate discussions. One such criterion is income per capita;
countries with high gross domestic product (GDP) per capita would thus be described as
developed countries. Another economic criterion is industrialization; countries in which the
tertiary and quaternary sectors of industry dominate would thus be described as developed.
More recently another measure, the Human Development Index, which combines with an
economic measure, national income, with other measures, indices for life expectancy and
education has become prominent. This criterion would define developed countries as those
with a very high (HDI) rating. However, many anomalies exist when determining
"developed" status by whichever measure is used.
Source adapted from: http://en.wikipedia.org/wiki/Developed_country

The United Kingdom has passed through the Economic stages of “industrialisation” as
determined by Economist as reaching the developed stage. Therefore the United Kingdom is
a major developed capitalist economy. It is a leading global trading nation, being the second
largest exporter and third largest importer of commercial services, and the tenth largest
exporter and sixth largest importer of merchandise. As well, it’s a member of the European
Union; the world’s largest trading entity, with nearly 500 million consumers and a GDP of
approximately US$17,000 billion.
The UK is one of the most competitive locations in Europe for business and personal
taxation, and has low unemployment (with an unemployment rate well below the European
Union average), and has the best European city – London – in which to do business.

The annual ICT Development Index, which was compiled by the International
Telecommunication Union, has ranked UK as the 10th most developed country in the world
of communication and information technology, but this position is not quite remarkable as it
lags behind other European neighbours as the prices of fast speed internet are quite higher
in the UK.

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In this indexing UK has been placed at tenth in world and it’s ahead of the likes of Germany
and the United States, but the country fell behind Korea, Sweden and Denmark. Source
adapted from: http://www.itu.int/ITU-D/ict/publications/idi/2009/index.html

3. What is the per capita income at the present?

Per capita income is a useful economic indicator for an area. Basically, the per capita income
is how much income each individual of a population would receive if the area's total income
were divided equally among all members of the population. It provides a general average
indication of wealth per person. Not an absolute or accurate measure of income, as the
income scales vary from one individual to another. Per capita income is often used as a
measure of the wealth of the population of a particular nation, especially when compared to
other nations.

The Business Dictionary defines per capita income as "total national income (GDP) divided
by total population." Total population includes children, elderly people and those out of
work, which means that per capita income does not indicate a country's average salary, but
the income per person. According to the Business Dictionary, it serves to estimate a nation's
living standards. (http://www.businessdictionary.com/definition/per-capita-income.html)

The UK has a population of more than 61m and a GDP per capita is US $37.4k, which makes
it the 30th richest country in the world, above the European Union average of US$33.8k.

4. What is the rate of economic growth at the present? Explain.

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Notice in the above diagram there have been two recessions in the last twenty-five years.
The early 1980s downturn was a deep recession – the worst downturn in the UK’s post-war
history. We can see the descent into recession in 1990 and 1991 and then a recovery which
was maintained throughout the remainder of the 1990s.

Judging from the above information we can now decide at what stage of growth the UK
economy is at. The diagram shows post 2006 the UK has lead into “Decline” and early 2009
the credit crunch has lead the UK into recession. The guardian (British newspaper) released
an article on Tuesday 26 January 2010 reporting Britain's economy finally clawed its way out
of its deepest recession since the 1930s in the fourth quarter of 2009, but it only managed to
expand by a much weaker than expected 0.1%. Shadow chancellor George Osborne said,
“After this great recession, any signs of growth are welcome. But these very weak growth
figures show that Gordon Brown's government left us badly prepared for the recession and
badly prepared for the recovery. We urgently need a new model of economic growth that
includes a credible deficit reduction plan that keeps mortgage rates low, creates jobs and
doesn't choke off recovery."

Over the last ten years, GDP growth in the UK has regularly outpaced or matched growth in
the European Union. As with other major countries globally, the UK economy contracted in
2009, due to the “Credit Crunch Crisis.” UK manufacturing grew at its fastest pace for 15
years in Q1 of 2010 aided by a weak pound, but a reduction in the services sector has seen a
slow to negligible rate of recovery in 2010.

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The United Kingdom' financial exports contribute significantly towards the balance of
payments. The UK has had an expanding export business in financial service, at least partly
due to the presence of a regulatory structure now accepted by the Government as
inadequate.
The UK property market boomed for the seven years up to 2008 and in some areas property
trebled in value over that period. The increase in property prices had a number of causes:
sustained economic growth, low interest rates, the growth in property investment, and
planning restrictions on the supply of new housing. (Retrieved from
http://tutor2u.net/economics/revision-notes/as-macro-uk-economic-cycle.html)

GDP Growth
Economy grows by 0.7% in Q3 2010

Real GDP quarterly growth

GDP growth has been revised down to 0.7 per cent in the latest quarter from 0.8 per cent
previously published. GDP in the third quarter of 2010 is now 2.7 per cent higher than the
third quarter of 2009.
Output of the production industries was revised down to 0.5 per cent in the latest quarter.
http://www.statistics.gov.uk/cci/nugget.asp?id=192

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 5. At what phase of the business cycle do you think the economy is
at the present and why?

The business cycle of a country’s economy involves the study of macro-economics. Before
deciding at what phase the UK is at according to the Business Cycle we must firstly
understand what the Business Cycle is:
“The regular pattern of fluctuations-upturns and down-turns in demand and output
within the economy, measured by gross-national product (GNP). Left to themselves, all
market economies repeat themselves every five years or so. The causes of this cyclical
pattern to economic activity are not fully known. It can be partly explained by gross-
national-product which is calculated by adding the value of all the production of a country
plus the net income from abroad-that is overseas investments minus the income earned by
foreigners investing in the domestic economy. Government policies affect the GNP and the
economic stages of the business cycle. For example government injecting investments into
the economy means increased spending leads to greater business prosperity and
productivity. Government policies on inflation, interest, unemployment etc all affects the
UK’s economic stage. The Business Cycle in general has four phases/stages:
1. Boom/Expansion/Peak
2. Decline
3. Recession/Slump/Depression
4. Recovery
5. The Economic Business Cycle has existed for over 150 years.”

 Definition of the Economic Business Cycle has been searched via two methods:
http://www.businessdictionary.com/definition/capitalism.html
 Complete A-Z Business Studies Handbook, 5th Edition, Prof. David Lines, Ian Marcouse, Barry
Martin, publishers Hodder Education.

A diagram below explains the basic pattern of a business cycle and the four stages.

The Business Cycle

Diagram A

Economic Activity

General Trend

1 Boom 2 Decline 4 Recovery

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 3 Recessions

Time

Diagram B

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In diagram A it shows the general pattern of the business cycle. Diagram B shows the
growth rate of the UK since 1970. It is clear to see the four stages of the business cycle every
five years. From the year 2000 to 2005 it shows a steady decline, phase/stage 2 of the
business cycle.

Even before the credit crunch took hold, economists were expecting a slowdown of growth,
both in the UK and in every major economy. However, there’s little doubt that the recent
crisis has helped to deepen the concerns surrounding the housing market and the wider
global economy. Problems first surfaced when the consequences of an over-inflated
housing market, and cheap mortgage loans to high-risk (‘sub prime’) homebuyers, began to
have a damaging effect on the US economy. Sharply rising interest rates meant that
suddenly, millions of homeowners faced the prospect of losing their home.
Credit became very expensive or virtually impossible to obtain and confidence in all financial
institutions rapidly disappeared. And then panic ensued. People fell back on their credit
payments and in extreme cases unable to pay. The problem stems from money lenders
issuing out loans and credit to easily and willingly to vast majority of the population. Interest
rates were used as bargaining power between one money lender and another, stealing
customers from each other.

Finally the Guardian also quoted:

"Today's fourth-quarter GDP numbers have confirmed that the UK has finally exited
recession – but barely," said James Knightley, economist at ING financial markets.

Some analysts think the economy has only returned to growth at all because of the
extraordinary support from the Bank of England in the form of ultra-low interest rates and
£200bn of "quantitative easing", as well as the government allowing the budget deficit to
expand hugely.
David Frost, director general of the British Chambers of Commerce, said: "This is good news,
but clearly growth is anaemic, and it certainly means that the economy is far from being out
of the woods."

Although there has been only a slight upward movement in the UK economy it is not enough
to classify as moving out of recession into recovery. It is difficult to predict exactly when the
economy will move from one stage to the next. It is clear that most of the world’s
developed markets are either already in or heading towards recession. The impact of the
credit crunch could therefore be felt for a few more years.

6. What are the chances of long-term economic growth?

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 Economic growth is the increase of per capita gross domestic product (GDP) or other
measure of aggregate income. The UK has enjoyed steady, if not spectacular, economic
growth during Labour's ten years in office – the longest uninterrupted period of growth in
200 years. It has been helped by the strong world economy, and by rising immigration and
public spending. If interest rates rise further, that could slow future UK growth. Below are
diagrams and an economic explanation of factors that contribute to long-term economic
growth:

An increase in Aggregate Demand (AD)

In the short term, economic growth is caused by an increase in AD. If there is spare capacity
in the economy then an increase in AD will cause a higher level of Real GDP.

AD can increase for the following reasons.

 Lower interest rates – this reduces the cost of borrowing and so encourages spending and
investment

 Increased wages. This increases disposable income and encourages consumer spending

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 Increased Govt spending. G is a component of AD

Classical Economists argue that an increase in AD will only increase Real GDP in the short
term. They argue that the LRAS is inelastic therefore higher AD only causes inflation.
This is disputed by Keynesians. They believe the LRAS can be elastic, e.g. in a recession

Long Term Economic Growth

This requires an increase in the Long Run Aggregate Supply as well as AD.

LRAS or potential growth can increase for the following reasons

1. Increased Capital e.g. investment in new factories or investment in infrastructure such as

roads and telephones.

2. Increase in working population

3. Increase in Labour productivity, through better education and training

4. Discovering new raw material

5. Technological improvements to improve the productivity of Capital and labour e.g.

Microcomputers and the internet have both contributed to increased economic growth.

The government must apply the correct formula combining Fiscal, Monetary and Industrial
policies to sustain long-term economic growth.

7. Does the country have any unemployment problems? Explain

There are three main types of unemployment, frictional, real wage and demand deficient.
Frictional unemployment almost always exists and little can be done to reduce its level to
zero. It occurs when one worker moves from one job to another and it is recorded on the
statistics. The second major type of unemployment that exists in the UK at present is Real

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Wage, this occurs as a basic form or cyclical unemployment and occurs simultaneously with
the Business Cycle again lasting for a period of 5 years plus. Real Wage unemployment is
due to an excess supply of labour in the economy. Demand deficient unemployment occurs
when there is a deflationary gap, thus aggregate supply exceeds aggregate demand. For the
UK it is the ‘Financial’ sector that experienced the initial impact of this type of
unemployment, with the other sectors that shortly followed.

The UK has a highly skilled, flexible and dynamic labour market, with less labour regulation
than most other European countries. Skills are particularly strong in the UK, with many
world-class universities and centres of research and development located across the
country. London is consistently ranked as the leading European location for the availability
of qualified staff.
Employment is currently at high levels with 28.86 million people in work, comprising 21.16
million in full-time work and 7.7 million in part-time work. The employment level (the
proportion of working age people in work) is also high in the UK at 72.2 per cent, compared
with the European Union average of 64.8 per cent.
The UK’s unemployment rate (using the internationally comparable “standardised” rate) of
7.8 per cent is significantly lower than the European Union average of 9.5 per cent. The
annual rate of growth of average earnings across the UK economy stood at 0.9 per cent in
January 2010.

The economy is expected to recover in 2010, but give the depth of the recession; output is
well below full capacity. It would take a long period of economic growth to overcome the
spare capacity. As economic growth increases unemployment levels reduce. Factors and
economic indicators that contribute to the recovery and unemployment issues are the
following:

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  Unprecedented monetary policy of 0.5% interest rates and quantitative easing
 20% depreciation in the Value of Sterling helps exporters and domestic demand
 Signs of Stronger recovery in Europe – our main trading partners
 House price falls have ended in 2009, this should help stabilise wealth and
confidence

8. Describe recent trends in the role and power of trade unions in

the UK.

A trade union (British English) or labour union (American English) is an organization of

workers who have banded together to achieve common goals such as better working
conditions. The trade union, through its leadership, bargains with the employer on behalf of
union members and negotiates labour contracts (collective bargaining) with employers. This
may include the negotiation of wages, work rules, complaint procedures, rules governing
hiring, firing and promotion of workers, benefits, workplace safety and policies. The
agreements negotiated by the union leaders are binding on the rank and file members and
the employer and in some cases on other non-member workers.

Trade unions in Britain experienced a serious decline from the time of the election of
Margaret Thatcher's Conservative government in 1979. Thatcher passed new union
legislation, which was largely seen as a direct response to the actions of trade unions during
the Winter of Discontent of the previous year. At that point the level of union participation
in the UK was around 80% of the workforce. Thatcher was committed to reducing the power
of the trades unions. Several unions launched strikes in response to legislation introduced to
curb their power, but these actions eventually collapsed, and gradually Thatcher's reforms
reduced the power and reforms of the trade unions. In 1982 the National Union of
Mineworkers accepted a Government offer of a 9.3 percent raise, rejecting their leaders' call
for a strike authorization. No doubt the majority of trade unionists now are office workers or
shop workers - industrial workers have become a minority. Initially many writers considered
that such white collar employees would necessarily be less militant than blue collar workers.
The rise in strike action by white collar workers in the 1970s contradicted this thesis.

9. What is the unemployment rate now?

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The number of people unemployed in the UK rose by 53,000 to 2.51 million during the three
months to March, official figures have shown. The unemployment total is now at its highest
level since December 1994.
However, the total number of people claiming unemployment benefit fell in April by 27,100
to 1.52 million - a sharper fall than expected.
The rate of unemployment remained at 8%, the Office for National Statistics said. There was
also a rise in the number of people classed as economically inactive - those out of work and
not seeking work. They rose by almost 100,000 to a record total of just under 8.2 million.
The ONS figures showed youth unemployment rising, with 941,000 16 to 24-year-olds out of
work in the January to March period - a rise of 18,000 on the previous three months. The
number of over-50s out of work for more than a year climbed 12,000 on the quarter to
146,000. And 1,066,000 people said they were working part-time because they could not
find a full-time job - up by 25,000. Retrieved from http://news.bbc.co.uk/2/hi/business/10109965.stm

10. Does the country have inflation problems? Explain

Inflation in Britain rose to a 17-month high of 3.7 percent in April, almost double the central
bank's 2 percent target, and has been surprisingly sticky in recent months. It is a long way
above our target level now but we have to take a long-term view.
The effect of changes to interest rates takes six to 12 months to come through. We believe
inflation will have also dropped by then. The economy would fare in the coming months was
difficult due to the uncertainty caused by the euro zone's sovereign debt crisis.
The euro zone problems in particular pose a risk to the fragile recovery of the UK economy.
Europe is our biggest export market and we factor that risk into our judgements. Bank of
England’s powers are expected to be enhanced by the new coalition government's decision
to give the central bank greater regulatory oversight. Retrieved from:
http://www.reuters.com/article/idUSLAH00674320100524

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11. What is the inflation rate (or deflation rate)?
The Bank of England has full operational independence in setting interest rates to meet the
Government’s inflation target of 2 per cent for the annual increase in the Consumer Price
Index (CPI). The CPI is based on the internationally comparable ‘‘Harmonised Index of
Consumer Prices’’. In March 2010, the CPI stood at 3 per cent.

from:http://www.reuters.com/article/idUSLAH00674320100524

12. Discuss the infrastructure and its role in economic

development.

An infrastructure is a relatively permanent and foundational capital investment of a

country, firm, or project that underlies and makes possible all its economic activity. It
includes administrative, telecommunications, transportation, utilities, and waste removal
and processing facilities. Infrastructure also includes education, health care, research and
development, and training facilities.
http://www.businessdictionary.com/definition/infrastructure.html#ixzz18slLdgBm

In addition to the above definition the existence of Entrepreneurs are also an essential
contributor to the infrastructure, some Economists consider entrepreneurs to be the 4 th
factor of production. In developed economies all these elements constitute a developed
infrastructure. For an economy to move from the recession stage to the recovery stage of
the economic business cycle Entrepreneurs and Firms depend upon the Countries
infrastructure. Therefore a reliable infrastructure and government investment to improve
the infrastructure is a critical component towards economic growth and sustainability. The
government needs to focus on a strategic infrastructure plan to get the country moving
again. The infrastructure provides as the basic input into production locally, nationally and
internationally. High quality infrastructure assets enhance a country’s national output. A

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large part of the private sectors productivity growth is connected to the size and quality of a
country’s infrastructure base and annual investment in it. Infrastructure spending generates
a large multiplier effect across the whole economy creating additional demand for materials
and services.
Example:
An Entrepreneur desires to set up a manufacturing firm in a rural area; this firm needs
infrastructure provisions such as gas supply, clean water, electricity, roads, waste disposal
and human resources etc. The economic nature of the infrastructure contribution depends
upon its relationship to other inputs in the productive process. The firm has very little or no
possibility of substituting for an infrastructure input such as clean water, therefore a certain
quality and quantity of provision is a necessary component in the production process then
important implications arise for economic growth. The firm will seek moving to a locality
where infrastructure is in surplus.
Similarly foreign investors and businesses seek such developed infrastructures along side
government economic policies. This attracts national, international and global enterprises to
set-up in the UK.

13. Discuss the recent social welfare and industrial policy in that
country. What is their impact on the economy?

Industrial policy forms part of government economic policy, and its goal should be to
maximize the welfare of citizens. In developed economies open to the world market, this
goal is closely linked to the competitiveness of companies and overall productivity of the
economy. The competitiveness of an economy refers to the ability of its companies to
compete in the international market. A company will have a competitive edge over rival
companies if it can produce the same products at a lower cost or better products at the
same cost that is if it has the edge in terms of cost or demand (product quality and variety).
Obviously, other policies like monetary and exchange rate policy, fiscal policy, incomes
policies or labour market reforms also affect the competitiveness of firms, but we do not
include them under the definition of industrial policy. Industrial policy has evolved over the
course of the post-war era. The 1960s and 1970s were marked by the fostering of national
champions, indicative planning, and state-owned firms with the objective of narrowing the
technological gap with US and Japan. This was also the period of trying to “pick winners” by
selecting industries that were forecasted to be successful or that had such potential if
appropriate help was given (those industries also typically had important externalities for
the rest of the economy).

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The Industrial policy has a direct affect on the social-welfare, welfare as an essential
complement to industrial development: social policy helps the economy to grow by serving
the workforce, providing services to industry and offering a secure basis for development.
Some Economists view that spending on welfare as a useful economic regulator, helping to
balance the economy in periods of recession.

14. What is the present fiscal policy? How is fiscal policy affecting
the economy? Do you agree with that fiscal policy?

Fiscal policy is the method that governments use to decide what it wants to spend, how
much it needs to raise and borrow. Government's revenue (taxation) and spending policy
designed to counter economic cycles in order to achieve lower unemployment, achieve low
or no inflation, and achieve sustained but controllable economic growth. In a recession,
governments stimulate the economy with deficit spending (expenditure exceeds revenue).
During period of expansion, they restrain a fast growing economy with higher taxes and aim
for a surplus (revenue exceeds expenditure).
http://www.businessdictionary.com/definition/fiscal-policy

During Gordon Brown’s stint as Chancellor, the Labour Party officially adopted the ‘Golden
Rule’ of fiscal policy. The Golden Rule states that over the full economic cycle, the
government should borrow to invest only for future needs. Current needs should be met by
tax revenues. This should allow for stable finances as defined by the ratios of public sector
net worth, debt and current expenditure to national income.
In conjunction with the Golden Rule, the UK government also seeks to follow the
Sustainable Investment Rule, which should keep national debt at a prudent level currently
set at 40 per cent of GDP.

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By the end of 2008 estimated public debt had already risen to 42 per cent, and could rise to
70 per cent of GDP by 2010, meaning that the Sustainable Investment Rule has been
broken.http://www.economywatch.com/world_economy/united-kingdom/bank-of-england-monetary-fiscal-
policy.html

Gordon Browns fiscal policy actions had led the UK into immense public deficit. UK Prime
Minister David Cameron said monetary policy should take the strain of boosting demand
and he argued the government should stick to its plans to remove the structural deficit
during this parliament. Cameron argued that monetary policy should act to
offset weakness rather than fiscal policy. http://www.forexlive.com/138354/all/uk-
cameron-backs-monetary-activism-fiscal-conservatism
However during 2010 under Conservatism, the increase of V.A.T has increased from 15%
back to its original 17.5%. Clearly David Cameron is applying a mixture of Fiscal and
Monetary policies to combat the recession.

15. What is the present monetary policy? How is the monetary policy affecting the
economy? Do you agree with that monetary policy?
Monetary policy is the Economic strategy chosen by a government in deciding expansion or
contraction in the country's money-supply. Applied usually through the central bank, a
monetary policy employs three major tools: buying or selling national debt, changing credit
restrictions, and changing the interest rates by changing reserve requirements. Monetary
policy plays the dominant role in control of the aggregate-demand and, by extension, of
inflation in an economy. http://www.businessdictionary.com/definition/monetary-
policy.html
As of Q1 2009, the Bank of England has already cut Interest Rates to a historic low of 1.0 per
cent, with the consensus believing this will drop to 0.5 per cent. Further measures are
probably needed, and this will include quantitative easing, in other words printing more
money. Up to 150 billion GBP in new money is expected to be pumped into the economy in
2009.
The Bank of England’s balance sheet will probably continue to grow as it shores up more
banks and financial institutions with both capital injections and loans, and as it acquires
Government Treasury bills to help finance the stimulus package will attempting to limit the
crowding out of private borrowers.

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Due to the present economic state that the UK is currently within, advocating the monetary
policy is a more powerful weapon than fiscal policy in controlling inflation and the necessary
steps to bringing the UK out of recession to increase its economic growth. Monetary policy
also involves changes in the value of the exchange rate since fluctuations in the currency
also impact on macroeconomic activity (incomes, output and prices).

Changes in short term interest rates affect the spending and savings behaviour of
households and businesses over time and therefore feed through the circular flow of
income and spending. The transmission mechanism of monetary policy works with variable
time lags depending on the interest elasticity of demand for different goods and services –
e.g. the demand for interest-sensitive consumer goods and services bought on credit or the
demand for capital investment from private sector businesses.

16. Evaluate the impact of the global economy on the UK

economy.

The term Global Economy refers to an integrated world economy with unrestricted and free
movement of goods, services and labour transnational. It projects the picture of an
increasingly inter-connected world with free movement of capital across countries, also. The
concept of a global economy cannot be understood in isolation. For this, globalization needs
to be defined first. Globalisation may be defined as the integration of production and
consumption in all markets across the world.

The main impact of the global economy on the UK economy is inflation and the financial
sector. The Financial services industry is a major contributor to economic activity and
growth in the UK, accounting for nearly 10% of total GDP. Because of the international
nature of financial markets, the financial services industry is heavily influenced by global
economic developments. These financial linkages to global markets are just one of the many
ways in which broader international developments affect the UK economy. Global economic
developments such as the recent turbulence in financial markets also have an important
bearing on the decisions of the Monetary Policy Committee (MPC).

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In an open economy like the UK, global forces can cause inflation to fluctuate around its
target level in the short term, and also inject volatility into the real economy. The rising oil
and commodity prices driven by strong global demand push up inflation in the UK and other
major economies over the past couple of years. By contrast, the recent changes in global
financial market conditions could weaken demand conditions in the UK and internationally
exerting downward pressure on inflation.
There are a wide variety of ways in which global economic developments impact the UK
economy and hence influence the rate of inflation. The whole process of globalisation has
structural effects on the UK economy, including the impact of labour migration. The first of
these is the impact of the prices of imported goods and services. Directly and indirectly,
imports account for around 30% of the value of goods and services sold by UK business at
home and abroad.
The second channel of influence from the global economy is via demand. Strong growth of
demand whether it originates at home or abroad allows profit margins to expand and can
put upward pressure on costs, particularly when the economy is operating close to its
capacity limits. By the same token, weak demand exerts a dampening influence on cost and
price increases. Influencing demand conditions through interest rates is one of the main
ways through which the Monetary Policy Committee controls UK inflation.

Bibliography

Title: Dictionary Business & Management

Edition: 2nd, 2004
Publisher: Bloomsbury Publishing Plc
Author: Fiona Pike

Title: Complete A-Z Business Studies Handbook

Edition: 5th, 2006
Publisher: Hodder Education
Author: Professor David Lines, Ian Marcouse, Barry Martin

Title: Business Studies for Advanced Level

Edition: 3rd, 2008
Publisher: Hodder Education
Author: Ian Marcouse, Malcolm Surridge, Andrew Gillespie

References
Bean, C (2006), ‘Globalisation and inflation’, Bank of England Quarterly Bulletin,
Q4, pages 468-75.

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Besley, T (2007), ‘Consumption and interest rates’, Bank of England Quarterly
Bulletin, Q3, pages 471-76.

OECD (2007), ‘Trends and Recent Developments in Foreign Direct Investment:

2007’.

Websites

http://en.wikipedia.org/wiki/Developed_country
http://www.itu.int/ITU-D/ict/publications/idi/2009/index.html
http://www.businessdictionary.com/definition/per-capita-income.html
http://tutor2u.net/economics/revision-notes/as-macro-uk-economic-cycle.html)
http://www.statistics.gov.uk/cci/nugget.asp?id=192
http://www.businessdictionary.com/definition/capitalism.html
http://news.bbc.co.uk/2/hi/business/10109965.stm
http://www.reuters.com/article/idUSLAH00674320100524
http://www.businessdictionary.com/definition/infrastructure.html#ixzz18slLdgBm
http://www.economywatch.com/world_economy/united-kingdom/bank-of-england-monetary-fiscal-
policy.html
http://www.forexlive.com/138354/all/uk-cameron-backs-monetary-activism-fiscal-
conservatism
. http://www.businessdictionary.com/definition/monetary-policy.html

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