A study on macro economy of UK

1. A Study on Macro economy
of
United Kingdom
SUBMITTED BY: SUBMITTED TO:
ABHISHEK VERMA (ROLL NO – 02) Dr. Jaydeep Mukherjee
ANKUR HURA (ROLL NO – 07) Professor
CYRIL SHARMA (ROLL NO – 12) Indian Institute of Foreign Trade
RAM JATAN KUMAR MAHATO (ROLL NO – 35)
TARIQUE ANWER (ROLL NO – 44)
MBA PT 2012-2015

2. Contents
1. Introduction.............................................................................................................................. 3
2. Basic Macroeconomics tools ................................................................................................. 14
3. Macroeconomics Problems UK faces.....................................................................................11
4. Bibliography...........................................................................................................................14
Tables and Figures Contents(UK) :
1. Exchange Rate.................................................................................Page 4
2. Nominal GDP..................................................................................Page 5
3. Inflation ..........................................................................................Page 6
4. Unemployment................................................................................Page 7
5. Industrial Performance....................................................................Page 8
6. Balance of Payments.......................................................................Page 9
7. Finanacial Balance..........................................................................Page 9
8. Budgetary Deficit...........................................................................Page 10

3. 1. Introduction
Agreed on the Two and Twentieth Day of July, in the fifth year of the Reign of Her moft
Excellent Majesty Queen ANNE (i.e. 22nd July 1706), by commiffioners Nominated on behalf of
the Kingdom of England, in purfuance of the Act made in England, the commiffioners
Nominated on behalf of the Kingdom of Scotland, under Her Majesties Great Seal of Scotland,
purfuaent to an Act made in Scotland. The ACT (made in the parliament of Scotland) Intituled,
ACT Ratifying and Approving the Treaty of Union of the Kingdom of Scotland and England.
The United Kingdom of Great Britain and Northern Ireland, commonly known as the United
Kingdom (UK) and Britain, is a sovereign state located off the north-western coast of continental
Europe. The country includes the island of Great Britain, the north-eastern part of the island of
Ireland, and many smaller islands. Northern Ireland is the only part of the UK that shares a land
border with another state—the Republic of Ireland. Apart from this land border, the UK is
surrounded by the Atlantic Ocean in the west and north, the North Sea in the east, the English
Channel in the south and the Irish Sea in the west.
The economic freedom of UK is 74.8, which makes its economy the 14th freest in the index of
2013. Its growth of score is 0.7 point higher than last year, which reflects efforts to improve
control of government spending. The U.K. is ranked 5th out of 43 countries in the Europe region.
Political Overview
The United Kingdom is governed within the framework of a constitutional monarchy, in which
the Monarch is the head of state and the Prime Minister of the United Kingdom is the head of
government. The current Prime Minister, David Cameron, leader of the Conservative Party, was
appointed by the Queen on 11 May 2010.
United Kingdom has got a stable government with moderate risk (social unrest data published by
The Economist Intelligence Unit Limited. www. http://viewswire.eiu.com) but there exist an
economic distress because of the Monarchy Government System. The risk of political unrest has
increased in 2009/10 in comparison with 2007 which may give birth to instability of
Government.
The relation of United Kingdom with European Union retrieved again in 2011 when UK vetoed
against the proposal made by France and Germany. The tensions over UK-EU relations, fiscal
austerity and economic weakness may persist. But it expected that the government to survive
until close to the end of its five-year term in May 2015. UK is expecting more monetary stimulus

4. since the deficit progress is slowing down. The economy stagnated in 2012 and remains fragile.
Real GDP is likely to grow by just 0.5% in 2013 and by an annual average of 1.1% in 2014-17.
Exchange rate of Pound Sterling in the past significantly gone down, which can be observed in
the graphs as under:
Exchange Rate
120.0
100.0
80.0
60.0
40.0
20.0
0.0
United Kingdom
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Year
Exchange Rate
Year
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Ex. Rate(INR) 97.5 100.2 99.3 100.8 97.1 101.6 100.0 100.5 102.2 89.5 80.1 79.6 79.0 82.4
Source: http://www.oecd.org, GBP vs INR(vertical axis)
Gross Domestic Product (GDP):
UK is the third largest economy in Europe after Germany and France. Over the past two decades,
the government has greatly reduced public ownership and contained the growth of social welfare
programs. UK is producing about 60% of its food needs with less than 2% of the labour force.
The UK became a net importer of energy in 2005. After emerging from recession in 1992,
Britain's economy enjoyed the longest period of expansion on record during which time growth
outpaced most of Western Europe. In 2008, however, the global financial crisis hit the economy.
Sharply declining home prices, high consumer debt, and the global economic slowdown
compounded Britain's economic problems, pushing the economy into recession in the latter half
of 2008 and prompting the government to implement a number of measures to stimulate the
economy and stabilize the financial markets; In 2010 the government initiated a five-year

5. austerity program, to lower budget deficit from over 10% of GDP in 2010 to nearly 1% by 2015.
The government raised the value added tax from 17.5% to 20% in 2011. It has pledged to reduce
the corporation tax rate to 21% by 2014. The Bank of England (BoE) implemented an asset
purchase program of up to £375 billion (approximately $605 billion) as of December 2012.
In 2012, weak consumer spending and subdued business investment weighed on the economy.
GDP fell 0.1%, and the budget deficit remained stubbornly high at 7.7% of GDP.
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
-1.0
-2.0
-3.0
-4.0
1988-98
1988-
98
Nominal GDP
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Nominal GDP
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Nominal
GDP 6.3 5.3 4.9 4.6 4.8 6.4 5.6 5.2 5.6 5.9 2.0 -2.7 4.6 3.6 2.0
Inflation
From 1989 until 2013, the United Kingdom Inflation Rate averaged 2.81 Percent reaching an all
time high of 8.50 Percent in April of 1991 and a record low of 0.50 Percent in May of 2000. In
the United Kingdom, the most important categories in the consumer price index are Transport
(16.2 percent of the total weight) and Housing, Water, Electricity, Gas and Other fuels (14.4
percent). Recreation and Culture accounts for 13.4 percent, Restaurants and Hotels for 11.4
percent, and Food and Non-alcoholic Beverages for 11.2 percent contributes to CPI. The index
also includes: Miscellaneous Goods and Services (9.6 percent); Clothing and Footwear (6.5
percent); Furniture, Household Equipment and Maintenance (6.1 percent). Alcoholic Beverages
and Tobacco; Health, Communication and Education account for remaining 11.2 percent of total
weight

6. The trend of Inflation till 2012 can be observed as under:
Inflation
2006 2007 2008 2009 2010 2011 2012
Year
Inflation
2006 2007 2008 2009 2010 2011 2012
5.00%
4.00%
3.00%
2.00%
1.00%
0.00%
-1.00%
Inflation 3.24% 2.85% 3.85% -0.34% 1.64% 3.16% 2.07%
Unemployment Rate
Unemployment is close to double figures (8.5%) – 2.5 million. The official figures also hide
some disguised unemployment, (such as enforced part-time work / early retirement) but,
unemployment is still a significant problem.
Unemployment is such a pressing economic problem because:
Increases relative poverty in the UK. (Unemployment benefits are substantially lower than
average wages). Unemployment is particularly stressful, causing alienation and reduced living
standards. Social division, fortunately, unemployment hasn’t increased to southern European
levels. Budgetary cost, persistently high unemployment adds to the budget deficit. The
government have to spend more on benefits, and they receive lower taxes. If unemployment
falls, it will be much easier to tackle the budget deficit.

7. Unemployment Rate
2006
2007
2008
2009
2010
2011
Year
Unemployment
Rate
2004 2005 2006 2007 2008 2009 2010 2011
10.0
8.0
6.0
4.0
2.0
0.0
2004
2005
Unemployment
Rate
4.7 4.7 5.5 5.3 5.4 7.8 7.9 8.0
Industrial Performance
The latest graph for economic growth shows the UK in a double dip recession. There are signs
that the UK may recover soon, but since 2008 growth has been way below the long run trend rate
of growth, leading to a significant loss in potential output.
Low economic growth adversely affects many different economic problems:

8. Industrial Performance
2010 2011 2012
Year
2010 2011 2012
91.5
91
90.5
90
89.5
89
88.5
88
87.5
87
86.5
Industrial
Production
90.8727 90.3018 88.2628
Balance of Payment
Industrial
Production
The Balance of Payments is the record of a country’s transactions / trade with the rest of the
world.
The balance of payments consists of:
1. Current Account (trade in goods, services + investment incomes + transfers)
2. Capital Account / Financial Account (capital and financial flows, net investment, portfolio
investment)
3. Errors and omissions. It is hard to collect all data so some is missed out.
In theory there should be a balancing between capital and current / financial account. If there is a
current account deficit, there should be a surplus on the capital / financial account.
Here we see that UK’s BoP is -1.9 in 2011. UK is trying to improve but in vain. In other words,
if we have a deficit on the current account to buy goods from China, we need foreign currency to
come from some other source to keep buying these imports.

9. Balance of Payment
2004 2005 2006 2007 2008 2009 2010 2011
BOP
2004 2005 2006 2007 2008 2009 2010 2011
0.0
-0.5
-1.0
-1.5
-2.0
-2.5
-3.0
-3.5
BOP -2.1 -2.1 -2.9 -2.3 -1.0 -1.3 -2.5 -1.9
0.0
-2.0
-4.0
-6.0
-8.0
-10.0
-12.0
Financial Balance (surplus: +, deficit:-)
2007 2008 2009 2010 2011 2012
Year
financial balance,
surplus (+), deficit (-)

10. 2007 2008 2009 2010 2011 2012
financial
balance,
surplus
(+),
deficit (-
)
-2.8 -5.0 -10.9 -10.1 -8.3 -6.6
Budgetary Deficit
Government debt is less pressing than the government have claimed. Since few years, they have
given indication that reducing debt levels are the most pressing economic problem. Because of
debt, the government have pursued austerity leading to lower growth. Long term spending
commitments and long-term debt forecasts are a problem. With an ageing population and
perhaps lower growth rates, it could be difficult to finance long-term spending commitments
from current tax levels. Debt is a long-term problem rather than short-term.
Budgetary Deficit
2004 2005 2006 2007 2008 2009 2010 2011 2012
0
-2
-4
-6
-8
-10
-12
Budgetary
Deficit
-3.4 -3.4 -3.4 -2.7 -2.7 -5.1 -11.5 -10.2 -7.8
-14
2004 2005 2006 2007 2008 2009 2010 2011 2012
Year
Budgetary Deficit

11. Global downturn, slump, recession add to the woes of all the countries worldwide.
Economies are trying their best to overcome this disaster for future growth and upscaling
output. Macroeconomic problems United Kingdom facing are :
Problem 1 – Rising Unemployment & hence thrifty consumers:
Solutions
Phillips Curve
It used to be largely believed that unemployment could be solved using the Phillips curve. This involves
increasing inflation to reduce unemployment by fooling workers into accepting jobsat a lower rate than
they would otherwise have done, due to the declining value of money. However, since the work of Milton
Friedman, it is widely accepted that the Phillips curve is vertical in the long run: you cannot achieve a
lowering of the unemployment rate in the long run, and attempts to do so will only cause inflat ion.
Demand side policies
Monetary policy and fiscal policy can both be used to increase short -term growth in the economy,
increasing the demand for labour and decreasing unemployment. The demand for labour in an economy
is derived from the demand for goods and services. As such, if the demand for goods and services in the
economy increases, the demand for labour will increase, increasing employment and wages.
Supply side policies
Minimum wages and union activity keep wages from falling, which means too many people want to sell
their labour at the going price but cannot. Supply-side policies can solve this by making the labour market
more flexible. These include removing the minimum wage and reducing the power of unions, which act as
a labour cartel.
Other supply side policies include education to make workers more attractive to employers. Cutting taxes
onn businesses and reducing regulation, create jobs and reduce unemployment.
Shifting tax burden
This method will shift tax burden to capital intensive firms and away from labour intensive firms. In theory
this will make firms shift operations to a more politically desired balance between labour intensive and
capital intensive production. The excess tax revenue from the jobs levy would finance labour intensive
public projects. However, by raising the value of labour artificially above capital, this would discourage
capital investment, the source of economic growth. With less growth, long-run employment would fall.
Problem – 2 : Rising FISCAL DEFICIT - UK heading for triple-dip recession as GDP
shrinks.

12. Solutions –
1. Austerity Measures – There is always a possibility to reduce huge expenses done by
Govt. If Govt. Really wants to reduce the deficit it should restrain from splurging on its
diplomats and ministers. In long run this step will be beneficial for the economy. It will
create a positive sentiment in the country.
2. Boost to Investment – Once country opens up its door for FDI and FII’s, Investors see an
opportunity to invest in the country if the returns are favourable. More the investment,
more the surplus and also it can help in setting up industries. Fiscal Expansionary and
Monetary Expansionary tools may be used to stimulate the economy. Retaining Capital
Account Surplus and avoiding Capital Flight to safety.
3. Boosting Exports and Restricting Imports – Raising import prices will lead to give
domestic players an opportunity to grow, which will eventually lead to higher GDP of
the country.
4. Monitoring Borrowing – Borrowing from external sources like IMF, World Bank, etc. Or
from internal sources like Private sector’s in a country has negative effects on the output
and it will increase deficit. So in order to strategically reduce the impact tracking the
borrowing and expenses may help.

13. Problem - 3 THE UK AND THE EUROPEAN UNION: A DIFFICULT RELATIONSHIP
Solution : It seems that generally there is limited trust among UK decision makers in the
politics and implementation efforts of other EU member states as well as EU institutions. For
example the Schengen opt-out, European Parliament (that foreigner ministers are involved in
shaping legislation is seen as a strange concept).
Furthermore the political culture of the UK seems to have a problem with the concept of
‘compromise’ and ‘negotiations’ which is vital for European institutions. UK need to accept that
the EU is here to stay and that different policies should be decided on the different levels with
the appropriate democratic control. There has been a negative sentiment about foreigners (EU) in
UK which needs to be taken care of . There is also a “Trust Deficit” among UK and EU. UK will loose
the “Weight and influence” it holds in EU region , if it opts out of EU. So rather than running away
UK should take a lead and give some constructive solutions to EU on the global crisis, like Strategic
planning for the recovery of long term financial crisis. UK also need to increase its EU
bargaining power.

14. Bibliography
http://www.tradingeconomics.com
http://en.wikipedia.org
http://viewswire.eiu.com
http://www.hm-treasury.gov.uk
http://www.bankofengland.co.uk
http://country.eiu.com/UK
http://www.guardian.co.uk
http://www.repec.org/
http://econ.worldbank.org
https://www.cia.gov

15. www.ons.gov.uk