The Demand Side Analysis for the United Kingdom
A. Describe the evolution of C, I, G and net exports and explain if the model of growth is domestic demand led or export led. Explain if it has changed during the period (at least ten years of data).
The United Kingdom’s economy is among largest economies in the world when measured by gross domestic income (GDP) and purchasing power parity (PPP). At the same time, it is the fifth most complex economy as reviewed by the Economic Complexity Index in 2013 where it experienced a massive negative balance of payment of $174B. Just like in any economy, UK’s growth domestic product (Y) comprises four components that include, investment ( I), consumption (C), government spending G as well as net exports ( X-M), where Y, X and M denotes national income, exports and imports respectively Smith, D. (2003). This relationship may be written as Y=C+I+G+(X-M). From the ever worsening trade deficits in the UK economy, it is evident its economic model is not export-led but rather domestic-led growth. The economy has realised an upwards surge in GDP from the year 2010, which however is merely export generated but rather domestically earned. This trend is illustrated in the table below
B. Look at variables like investment and exports in detail.
The United Kingdom is the eleventh largest export economy in the world with its principal exports being cars, refined petroleum, packaged medicaments and gas turbines. However, over the past ten years, the UK has realised an adverse balance of payment probably due to her devalued currency in relative to that of her trading partners (Bamford & Grant, 2000). For instance, in 2013, her exports and imports were valued at $453B and 628B respectively, resulting to a negative balance of payment of$174B.This has consequently led to low government investment.
C. Use (X-M) = (T-G) + (S-I) to explain if the United Kingdom has access savings or if it needs foreign financing. Is this a problem? What is the evolution of private and public savings?
Over the last couple of years, the United Kingdom has suffered a trade deficit which has consequently hampered economic growth. This implies that for the equation
(X-M)= (T-G) + S-I) to hold, then government revenue and savings must be higher than public expenditure and investment (Berrill, 1990), (Miller, 2010). Unfortunately, due to a trade deficit, government earning is substantially reduced implying that savings are on the rise to offset the adverse balance of payment. Therefore, UK does not necessarily need foreign financing (Matthews & Thompson, 2012).
D. Deficits and Debt. Look at debt dynamics.
Public debt in the United Kingdom is mainly a burden of the central government. In the year 2005, it had a public debt of less than half a trillion pounds which worsened with the crisis of 2008 to 2011 with public debts increasing tremendously (Cameron, 2014). Towards the end of the fiscal year 2015-2016, the national debt had gone beyond 1.5trllion pounds. This increase may be attributed to the adverse trade balance that significantly reduces government revenue, thereby propelling it to borrow both internally and externally.
E. Does the Phillips curve hold?
The Phillips curve hold for the economy of the United Kingdom as when the level of unemployment is high, wages increases at a lower rate but when the rate of unemployment reduced, wages rose rapidly and consequently inflation. For the last decade, unemployment in the United Kingdom has been rising sharply probably due to the high wages demanded for by the labour unions; as a consequence, inflation has fallen tremendously with a level of only 5% being experienced in the year 2014. This is because high rates of unemployment will attract low wages thereby curtailing the level of inflation (Cameron, 2014). Ideally, when there are high numbers of unemployed workers, who are willing and able to work at the prevailing conditions, employers will always shut down the demands of labour unions to heighten money wages, which is very significant in controlling money supply in the economy, hence, inflation. This is in agreement with the Philips curve which denotes an inverse relationship between the rate of unemployment and inflation (Lee, 2005).
F. Do Monetary and Fiscal policy agree with the changes evolution of the demand side variables (business cycle)?
Ideally, at low money wages, the economy will be able to absorb more workers at the existing resources, which may not have been possible at the previous high wages. Similarly, government through the central bank has embarked in policies such as selling of government bonds with an aim of reducing the money supply in the economy, which in return will lead to more economic growth and development (Lee, 2005). Notably, both the central and the regional government have embarked in the fiscal policies of economic regulation such increase in taxation as well as diversifying sources of government revenue so as to minimise the levels of public debt which is on the rise in the United Kingdom. These policies are of equal importance in regulating the demand side variables and the general economy towards the equilibrium particularly now that the United Kingdom is experiencing a recession crisis.
G. What do you expect to happen to the economy from the demand in 2015?
With the effectiveness of both the monetary and the fiscal policies of economic control, I expect the economy of the United Kingdom to experience an upward trend, beyond 2.9 that was realised in 2014. This will only be possible if the negative trend on the balance of payment is reversed, which is only possible by revaluing the nation’s currency. Ideally, by revaluation of the Euro pound in relation to the currency of its trading partners, the value of the country’s export will increase in relation to its imports, which in return will reverse its balance of payment.
References
Bamford, C. G.,S & Grant, S. (2000). The UK economy in a global context. Oxford: Heinemann.
Beetsma, R. M. W. J., Favero, C., Missale, A., Muscatelli, V. A., & Conference. (2004). Monetary policy, fiscal policies and labour markets: Macroeconomic policymaking in the EMU. Cambridge [u.a.: Cambridge Univ. Press.
Berrill, K. (1990). The economy of the Southern Cameroons under United Kingdom trusteeship. Cambridge [England.
Cameron, G. (2014). Innovation and economic growth in UK manufacturing. Oxford: Centre for Economic Performance, Institute of Economics and Statistics, Oxford University.
Lee, C. H. (1995). Scotland and the United Kingdom: The economy and the Union in the twentieth century. Manchester: Manchester University Press.
Matthews, K. G. P., & Thompson, J. L. (2012). A model of the U.K. financial sector: The non bank private sector. Leuven: Centrum voor Economische Studien.
Miller, Fred, Agnes F.. Vandome and John McBrewster. Economy of the United Kingdom Purchasing Power Parity, Organisation for Economic- Co-operation and Development, Economy of London, European Economic Community. Mauritius: Alphascript, 2010. Print.
Smith, D. (2003). UK current economic policy. Oxford: Heinemann Educational Books - Secondary Division.
