UK Economic Indicators

These are the economic statistics (as of March 2015):

• GDP - 2522 billion (USD)

• GDP Growth Rate - 0.5%

• GDP Growth rate (annual) - 2.7%

• UNEMPLOYMENT - 5.7%

• POPULATION - 64.31 million

• WAGE GROWTH - 1.8%

• INFLATION (CPI) - 0.3%

• INTEREST RATE - 0.5%

• BALANCE OF TRADE - -616 million (GBP)

• CURRENT ACCOUNT DEFICIT - -4.4% of GDP

• GOVERNMENT DEBT - -6216 million (GBP)

Disadvantages of Globalisation

There are also many drawbacks of globalisation:

• Free Trade can harm developing countries: Developing countries often struggle to compete with the developed countries and therefore the free trade tends to benefit the more developed countries as oppose to the less developed. 

• Environmental costs: Globalisation has increased the usage of non renewable sources of energy and therefore has led to the polluting of the Earth by releasing greenhouse gases. 

• Labour drain: Globalisation enables worker to move more freely and therefore some countries find that it is difficult to hold on to their best skilled workers as they are attracted by higher wages elsewhere. 

• Less Cultural Diversity: Globalisation has led to the increased economic and cultural hegemony. With gloablisation there is arguable less cultural diversity, however it has led to more options for some people. 

• Tax competition and tax avoidance: MNCs like Amazon and Google, can set up offices in different countries like Bermuda and Luxembourg with very low rates of corporation tax and then funnel their profits through these subsidiaries. This means they pay less tax and governments have to increase taxes on VAT and income tax to counter for this. 

Benefits of Globalisation

There are many benefits that arise as a result of globalisation.

• Free Trade: This is a way for countries to exchange goods and resources. This means countries can specialise in producing goods where they have a comparative advantage (this means they can produce goods at a lower opportunity cost). When countries specialise there will be several gains from trade:

1. Lower prices for consumers
2. Greater choice of goods
3. Bigger export markets for domestic manufacturers
4. Economies of scale through being able to specialise in certain goods
5. Greater competition

• Free movement of Labour: Increased labour migration gives advantages to both workers and recipient countries. If a country experiences high unemployment, there are increased opportunities to look for work elsewhere. This process of labour migration also helps reduce geographical inequality. This has been quite effective in the EU, with many Eastern European workers migrating west.
  Also, it helps countries with labour shortages fill important posts. For example, the UK needed to recruit nurses from the far east to fill shortages.
  However, this issue is also quite controversial. Some are concerned that free movement of labour can cause excess pressure on housing and social services in some countries. Countries like the US have responded to this process by actively trying to prevent migrants from other countries.
• Economies of Scale: Production is increasingly specialised. Globalisation enables goods to be produced in different parts of the world. This greater specialisation enables lower average costs and lower prices for consumers.
• Greater Competition: Domestic monopolies used to be protected by lack of competition. However, globalisation means that firms face greater competition from foreign firms.
• Increased FDI: Globalisation has also enabled increased levels of investment. It has made it easier for countries to attract short term and long term investment. Investment by multinational companies can play a big role in improving the economies of developing countries.

Globalisation

Globalisation is the world becoming increasingly interconnected due to increased trade and cultural change.  It is the process by which, people, cultures, money, goods and information can be transferred between countries.

Features of Globalisation:

• Emergence of global brands e.g. McDonald's
• International Trade.
• Dependence on the global economy
• Businesses that operate in more than one country
• Freer movement of goods, services, labour and capital.
• Migration - the movement of people from one place to another. 

Solutions to Poverty

·         Charities: The primary way of stopping poverty, absolute poverty, would be through the use of charities. Charities run based on donations from the public, whether it be in the monetary format or through materialistic possessions in the intention to give this as a form of aid to those less fortunate in order to give them the same basic rights that others in society have. This includes, clean water, food and even shelter. In the UK, we are a country where absolute is said to have been fully eradicated however charity would still help as there are some that are not as privileged as the richest and live in condition below those that are recommended. Charity, stands more as an international ideology, and occurs in all countries over the world and proves to work effectively as we can see a gradual decrease in the levels of poverty over the globe. The same is done through the use of NGOs.

·         Welfare State: A secondary way of reducing poverty, particularly in the UK, is the Welfare State. The welfare state in the UK is aimed at tackling the issues for those who are financially troubled or even practical support for those who need it most. This serves a system whereby the government undertakes the key responsibility of protecting the health and the well-being of its many citizens. It does this by means of providing grants, pensions, other benefits and the NHS which plays the largest part. Our Welfare State provides support in the form of money transfers such as income support for those who are unemployed. This means that families that have a very low income coming in, or no income, can still have access to the basic human rights. In addition to this those who are retired or cannot work due to disability might often find themselves in poverty due to their inability to find a source of income. However the strength of the welfare system means that in the UK this problem is tackled and there are schemes such as the state retirement pension that aid the situation. As a result of this, this prevents the poorest members of society into falling into further financial problems and maybe even absolute poverty.

·         Education: As much as this may seem unrelated, education is vital in reducing the key issue of poverty even in the UK, where the education system is said to be very respectable.  Education means that people build a foundation for their success in the future. Although the primary cause of poverty still stands at income inequality, this is all rooted back to the education that some receive and the lack of it for others. With a good schooling, it is inevitable that it will create a stronger workforce that works on the basis of skilled labour pool. With this, the overall output of the economy is likely to increase which should consequently result in higher wages and more and more people working their way up the ‘work ladder.’ With this, we can ensure that everybody has the access all basic rights and everyone earns enough to live a fruitful life. Due to this, education will mean that there is less poverty as fewer will be stuck in the low paying jobs. There are many countries where some do not receive and education at all and these are the countries where the high levels of illiteracy means that the poverty levels are highest due to a lack of an income for families.

·         Progressive Taxation: Another solution to the long lasting issue of poverty is progressive taxation. Progressive taxation is the mechanism in which the taxing authorities ensure that the individuals with the largest incomes pay the most in taxes and the lowest earning pays the least. This is a system that has already been implemented in the UK, however, the lowest of earners claim that it is still not strict enough as many are use a ploy known as tax avoidance. By doing this they avoid paying taxes on some or all of their income by using havens such as Switzerland and as a result the government do not get enough money to support the system. However if this was made stricter and the bands were increased from the current standings of 20%, 40% and 45%, then there will be greater revenue for the government which can be reinvested in to reducing the poverty rates.

·         Cancelling large world debts: In order to tackle an issue as big as poverty, the primary step to take is to attack the root causes. Governments could begin by cancelling the immensely large world debts that are unlikely to be paid off by this generation. In the UK national debt is currently at 75% of GDP and due to poverty, the government spending still remains greater than government taxation meaning that poverty is only likely to rise. However if these large debts are cancelled then this money can be reinvested in to areas such as education that will help to reduce poverty or healthcare which will help to reduce the impacts of poverty.

·         Microfinancing: This is a modern way of reducing the impacts of poverty and their long lasting effects on society. Through Microfinancing, poorer member of society, often those that are unemployed will be given grants and subsidies towards running their own businesses to allow themselves to get back on to the employment ladder, whilst also promoting growth in the UK economy. In periods of recovery, like we are in now, this would be beneficial as this is likely to increase investment in the UK and aggregate demand which results in a greater real output and greater GDP. 

Effects of Poverty to Society

• Crime: As much as crime is an impact on the individual it also impacts society as the tax payer must pay taxes in order to rebuild the damage that is caused to society as a result of crime. Furthermore, if the UK government continues to spend in these areas then they will not be able to invest money else where. 
• Reinvestment: When there are large amounts of money being rebooted into providing aid through the welfare state for the people impoverished in the UK it will mean that the 'standard of living' cannot be improved. 
• Higher Taxes: The poverty will lead to crime and unemployment and the tax payer will have to pay more money in tax in order for the welfare state to be able to support the growing numbers of people that require it.

Effects on the Government

• Costs: The major impacting factor is the excess amounts that the government will have to spend in order to ensure that everybody in the country lives in healthy conditions and is not forced into absolute poverty. Welfare state currently costs UK government £202.6 bn. With increased costs to the UK government, we can confirm that the budget deficit will increase from 6.5% and the national debt of 75% will follow suit. 

Effects of Poverty on the Individual

• Malnutrition: Poverty drives people into poor housing and living conditions. due to the lack of money and wealth, they are not able to afford the basic nutrients required for survival such as food and water and hence it leads to them become under nourished. In the UK 3 million people are malnourished. 

• Depression: one in four people in the UK will feel some sort of mental health issues during the course of the year, and this may be as a result of paying the hefty bills and other costs incurred when running a family. For those who are impoverished, this worry will be greater and therefore this could lead to depression and possibly suicide. In the UK suicide rates stand at 400 people per 100,000.

• Crime: Criminal activity increase as a result of relative poverty and absolute poverty, as people may steal of commit crimes as it is their only way to make money and survive. Or they may steal to help bridge that gap between the rich and the poor themselves. 

• Social Exclusion: As a consequence of poverty an individual may find that they are excluded from the rest of community. It leads to some with particularly low incomes being alienated and separate mainly due to their level of income. In the UK the average adult has a 22.7% chance of falling in to the trap of social exclusion. 

Causes of Poverty

There are multiple causes of poverty and they still exist around the world today.

• Unemployment: This means that families do not have enough money in order to allow themselves to buy the basic necessities required to survive. IN the UK 42% of families below the poverty line (relative) contain no working members. 

• Income inequality: The gap between the rich and the poor has been an issue nagging governments, the workforce and everyone in general. In all countries following a capitalist movement there is and always will be the issue of some being better off then others, hence why relative poverty exists. In the UK the richest 20% earn 7.2% more that the poorest 20% showing how there is a large gap. 

• Low Paid Work: Even those in work many find themselves to be under the poverty line in the UK due to the unfair wages often implemented by firms as they attempt to cut down on their cost of production. 58% of families that were impoverished but had at least one working member in their family showing that even with work they are still unemployed. 

• Education: This is another key cause. It is the first step in the ladder of success and remains the foundation of almost everything as a basic knowledge is required to do any job successfully. Without required education it leads to unemployment and hence you are trapped in the vicious cycle of poverty.

• Obesity: Although this may seem more secondary, it may result in very serious problems for people. Being overweight means that mobility is often a hindrance and causes unemployment forcing people into poverty.

• Inflation: In UK it currently stand as 0.3% (CPI) which may still be higher than the increase of wage rates at many different jobs. As a result, the cost of living rises faster than people can afford and therefore this leads to poverty as some many not be able to afford the necessities and this may leave them to ' live on the breadline.'

• Disability: Like obesity, this is also another key cause of poverty. It is very common as to why people cannot work and therefore they have no income and the benefits offered by the welfare state may not always be enough to bring them out of poverty given their heavy medical costs. 

Measuring Poverty

In total there are three different ways of measuring poverty all of which are valid and they all vary in terms of one's interpretation of what poverty actually means.

• Income: Although poverty is not just money, this is possibly the most widely used system for measuring poverty. Household income is easy to collect and gives a fair representation of the difference between the rich and the poor. The World bank suggests that you live in poverty if you earn less than $1.25 per day. In the UK it is said that if you earn less than £15900 per year you are relatively poor. 
• Consumption: Some would argue that this gives an overall better impression of what poverty really means, as it relates back to wealth and not just incomes. However with this figure, an exact value cannot been given as the poverty line. 
• Well-being: Although this may be vague, it is still valid as it is based on their quality of life and standard of living. However it does not give a perfect impression on where the poverty line lies in the UK.

Poverty

The United Nations defines poverty as 'the inability of getting choices and opportunities, a violation of human dignity. It means a lack of basic capacity to participate effectively in society.'

Within poverty itself there are two types:

• Absolute Poverty: This refers to the state at which people live with income levels that are lower than the level needed for the basic necessities in life such as food, shelter and water. This depends not only on an individuals in come but also on their ability to gain access to certain services.
• Relative Poverty: This refers to those on low income relative to the country's average. It is the individuals quality of life in a particular situation and is defined in terms of the society that the candidate lives in and hence varies from country to country. Relative poverty reflects better the cost of social inclusion and equality of opportunity in a specific time and space. 

In the UK absolute poverty does not exist and has been completely eradicated whereas relative poverty does. One fifth of the UK population live under the relative population line. This is where their total income is less than 60% of the average wage which stands at £26500. 

 

Supply Side Policies

    Supply Side Policies: These are government policies to encourage the economy to increase its potential growth rate.

   Factors affecting Supply Side policies:

·         Education: A more educated workforce will mean that there is a larger labour pool and hence greater labour productivity. There is lot more encouragement for education and training e.g. EMA and NVQ’s.

·         Competition: This leads to higher output levels and lower prices because of the pressure between businesses to retain customers. Markets have been deregulated. Deregulation means new businesses enter the market to create competition for greater quality.

·         Labour market policies: Decreasing direct taxes gives people more incentive to re-join workforce. Trade Unions work towards reducing unemployment and giving greater wages. 

Monetary Policy

The monetary policy refers to the policy that is used to control the supply or the cost of money. Essentially it changes the interest rates and changing quantitative easing. The monetary policy has a large effect on inflation.

·         Controlling Inflation:

1.       Most house purchases are financed by mortgages. Interest payments on this are paid monthly depending on interest rates. Higher monthly payments means less money for consumption hence inflation goes down.

2.       Many high value purchases e.g. cars and houses are financed on credit. Higher interest rates mean fewer people will consume and so inflation goes down.

3.       Higher interest rates, encourage saving due to eh higher interest on savings. Obviously, this leads to less spending in the economy.

4.       Since 1997, the Bank of England has been instructed to set interest rates each month to keep UK inflation and stable at around 2%. 

Fiscal Policy

The fiscal policy is the decisions made by the government for government expenditure and taxation. The fiscal policy is changed whenever necessary in order to suit the situation that the country is in. This policy tends to have large effects on the macro economic objectives:

• Inflation: Increase in government spending leads to greater inflation. If the AD increase due to the rising government spending then the price level will also go up. If there is a reduction in taxes, particularly indirect taxes, then consumption will go up and so AD will shift causing inflation to rise. 
• Economic growth: Higher government spending will encourage faster growth as output increases rapidly. Cuts in taxation will also increase economic growth as it means consumption increases. 
• Unemployment: Higher government spending will reduce unemployment as higher spending creates more demand for output. Lower taxation, especially income tax means that more people will be inclined to work as less money that they earn goes towards tax. 
• Balance of Payments: Higher government spending and lower taxation mean more economic growth through higher overall spending. Higher spending means that more people are likely to purchase imports and therefore this causes a budget deficit. 

Taxes

There are three types of taxes in the UK:

1. Indirect Taxes: these are taxes that are placed on expenditure for example Value Added tax. 
2. Direct Taxes: These are taxes that are placed on your income itself such as Income Tax. 
3. Other taxes:

• Stamp Duty is placed on the purchase price of a house at varying rates. 
• Council tax is charged on each and every house in the country. 
• Inheritance tax is paid on any inheritance warned when an estate passes hands. 

Social Protection: This will include welfare payments paid to those in need. the qualification for some benefits are not automatic e.g. Job Seeker's Allowance. 

Health: Health spending is the second largest component of government expenditure. NHS gives health care freely to anyone who wants it. As UK population is ageing the need for NHS is greater. 

Economic Cycle

   Economic Cycle:

·         Boom: Economic growth is well above average. Consumer spending is high and people are more confident and unemployment is falling or is low. Investment from businesses is high. As a result of all of this inflation is likely to rise.

·         Recession: Economic growth will start to fall below the average growth rate. This is when growth has been negative for the last two consecutive quarters. Investment is likely to fall and inflation is likely to fall. Imports will begin to decline and consumer spending will lower.

·         Slump: Growth is slow or negative. Consumer spending will be low and could actually be falling where consumer spending is lower than in earlier time periods. This is likely to be because consumers feel pessimistic and insecure about their jobs and the chances of keeping their jobs in the future. Inflation is likely to be low. Businesses attempt to encourage more spending. Imports are likely to be low in growth or even falling. Balance of payments moves into surplus, where exports exceed imports.

·         Recovery: Economic growth will start to rise towards the average level again. If economic growth has been negative, it will start to reach positive rates again. Confidence will return to customers and businesses. Consumer spending will start to rise again and businesses will begin investing again. Unemployment is likely to stop rising and may not even begin to fall, although the level of unemployment may still be high. Inflation will also stop falling. 

Externalities

Externalities are the additional costs or benefits beyond the private ones imposed mainly on society that arise out of a production or consumption decision.

Negative Externality: This occurs when a product or decision costs the society more that its private cost. It is generally viewed as a failure of the market because the level of consumption or production of the product is higher than what the society requires. Car pollution is an example; as a driver of a car, you don't account for the costs of the air pollution created by the car, but society is paying for the costs of air pollution.

Positive externalities occur when the benefits to society from consumption of a product exceed the private benefits to the individual consumer. The private benefits to a town of having a large business set up in the local area would include the bushiness gaining extra profits but it would be the (local) society that gains from the external benefits of the new business in terms of employment opportunities and the extra income generated.

Market Failure

Market failure occurs when an economy or market fails to allocate its resources efficiently.

How can Markets fail?

• Lack of Competition: This leads to many inefficiencies in how businesses operate. with little or no competition there is less incentive for firms to improve the quality of output to keep the prices low. For example it is only after cheaper options such as Ryanair joined that established airlines had to reduce their prices. 
• Not all our values are Market Values: This means that some goods are valued differently by society than the monetary value that is placed on them. Education and healthcare in the UK would not be produced in sufficient quantity by a free market because consumers would not want to purchase those services at those prices. for example we may not understand the true social benefits of having adequate healthcare provision if we had to purchase it as a normal service.  

Free Market Economies

Free Market Economies are a system where all economic decisions are taken by private individuals and businesses.

Advantages of Free Market Economies:

• Prices should be lower as competition between businesses ensures that prices cannot rise too fast. 
• Quality of output should be high, also due to the competition. 

Disadvantages of Free Market Economics:

• Some businesses may monopolize a market and will not have to provide low prices and high quality due to the lack of competition.
• Consumers may not be able to afford to vital products - especially if they cannot provide for themselves, meaning that poverty and inequality are more likely. 

Mixed Market Economies: A system that is partly a free market economy but also has government involvement in economic decisions. 

Alternatives to the Welfare State

    Alternative to the Welfare State:

·         The first thing is would be the increase in the role of the voluntary sector. Charities currently employ over 500,000 workers in the UK. The small scale and large scale charity organisations are set up to provide support for those without jobs or homes.

·         Also people suggest that you could modify the welfare state. Firstly some benefits could be made universal so that it is provided regardless of the income of the families. In addition to this they could have separate benefits only for those meeting certain conditions. This would mean that it would save the government a lot more money and if not give more aid to those who need the aid the most. 

Costs of the Welfare State

   Costs of the Welfare State:

·         Removal of incentives to work: Some people believe that there are greater rewards from earning benefits rather than actually working and hence unemployment will be increased.

·         Higher Taxation: The welfare state is funded by the taxation of those in employment, particularly those with higher and above average wages. If there is more need for the welfare state then these people will have to pay greater amounts of taxes even though they are not personally using it. 

Benefits of the Welfare State

     Benefits of Welfare State:

·         Poverty is reduced: As more people have access to the basic rights and healthcare that they need free of cost to them. This means the poorest members of society can avoid falling into absolute poverty.

·         Inequality is reduced: The welfare state is funded by taxation and so the wealthier are taxed more heavily and so this helps to bridge the gap between the rich and the poor. This is seen as ethically correct.

·         Overall health is increased: Everyone benefits from the welfare state. The NHS provides healthcare and medical treatment effectively free of cost and so the overall health is improved. If this was left to be done privately then some people may not have been able to afford to get help and so this may result in lower overall health. 

The Welfare State

The Welfare State is where financial or practical help is give to those who need the most support in society. In the UK there is a large welfare state that consists of many things such as NHS which plays a big part is providing a more equal society.

Conflicts caused by Economic Growth

   Conflicts with other economic objectives:

·         Low Inflation: High growth will mean that price level increases and so it is difficult to keep inflation stable. This is because higher growth means resources in the economy are more fully used, and so become scarcer, which causes the price to increase.

·         Balance of Payments: Higher growth leads to higher consumption and so more imports are purchased and so this leads to greater budget deficit. This way this can be combated is if economic growth arises from demand for exports and so it would not lead to budget deficit. 

Costs of Economic Growth

     Costs of Growth:

·         Environmental costs: Higher growth means higher output. This means factories generate higher pollution in the production process. Also it may mean worsening traffic and congestion and unaffordable house prices.

·         Inequality: Although growth is beneficial, it will not benefit everyone equally. Those benefitting most will be those with already above average incomes. This will increase the income inequality and so relative poverty will increase.  

Benefits of Economic Growth

    Benefits of Growth:

·         Better living standards: higher growth means higher incomes and so people can enjoy a higher standard of living.

·         Reduction of poverty: economic growth helps to move poorer sections of population out of poverty. Absolute poverty has been eliminated in the UK, but relative poverty still exists.

·         Investments in infrastructure: This improves education, improves health and improved transport links. Higher growth means that governments collect more tax revenue and can spend it in priority areas

·         Lower Crime: As growth rises, the bridge between the rich and the poor may reduce, and so incentive to commit crime will be lower. 

Macro Economic Objectives

     Macro-Economic Objectives:

·         Economic Growth: this looks at how fast national income rises over a period of time. Governments want economic growth as it adds to national income and gives a better standard of living. A feature of high growth is high consumer spending and this is as a result of rising prices.

·         Full Employment: Governments want to achieve full employment. This is not necessarily no unemployment, it just refers to those actively seeking employment. If unemployment falls too low then income will go down and consumption will decrease causing prices to rise.

·         Stable Prices: It is in the government’s best interest to keep prices generally stable. A period where there is continual increase in prices is called inflation. The UK’s current desired rate of inflation is 2%.

·         Balance of Payments: This refers to the financial transactions between the UK and all other foreign countries over a period of time. The government want the exports to be equal to the imports. Currently in the UK, there is budget deficit.