The above graph shows the trends of the ‘money’ GDP and the ‘real’ GDP from 1992 to 2005, which the ‘real’ GDP is using 2003 as the based year. The data shows that the ‘money’ GDP has a bigger increased rate than the ‘real’ GDP as the ‘money’ GDP the figures has doubled from 1992 to 2005, and the ‘real’ GDP has only increased 44%, from £806 billion in 1992 to £1,170 billion in 2005. According to the table 1.1 from the UK National Income Accounts, the price level has increased 40 %, from 76% in 1992 to 105% in 2005. It indicates that the large increased in the ‘money’ GDP does not mean that the country has produced such a large amount of outputs, as the inflation was taken into account, which it can be reflected by the increased of the price level.
In addition, ‘Real’ GDP is used to measure the standard of living in the country. The calculation is the GDP divided by the population and it is known as the GDP per capita. The advantages to use GDP per capita as an indicator of standard living are that most countries in the world provide information on GDP regularly, and it allows countries to make comparison. The disadvantages are GDP is mainly focus on measuring the output that a country produced, for example, a country which exported 80 per cent of its production might still have a high GDP, but it does not mean they have a high standard of living. Also, the output of some goods and services might not recorded, e.g. DIY product or service, black market, etc. For example, Thailand is said to have the world’s largest black market, which accounted for more than 70 % in their official GDP, so it is definitely inaccurate to use the GDP to represent their standard of living. However, the GDP per capita does reflect the productivity of a country, and it can be seen that the standard of living of a country tends to increase when GDP per capita increases.
(2)Using the data available for year-on-year growth rates for the economy and any graphs you may have decided to produce, examine and describe the pattern of growth over the last two decades. Are there any significant features over this period? What are likely to have been the main effects of the changes in growth experienced during this period?
First of all, the graph above shows the long term of economic growth rate of UK, from 1959 to 2000. The UK real output grew on average by 2.6% a year. However, fluctuation can be seen and it indicates that the UK economic growth was unstable.
In order to identify and describe the UK’s economic growth more briefly, another graph is used, which shows the recent years of UK’s economic growth over the last two decades:
During the last two decades, from 1985 to 2005, though the UK real output grew average by 2.7% a year. In fact, the UK economy has experienced unsettled growth over the period of time as fluctuation can be seen in the graph. The fluctuation is known as the business cycle and it can be described by four phases: A peak is the upper point of a business cycle, where an expansion ends and a contraction begins. The peak occurred in 1988, when UK just had experienced a steady growth from 1984 (2.5%) to 1988 (5.2%) and began to decline in 1989 (2.2%). A contraction describes a slow down in the pace of economy activity, which occurred between 1989 (2.2%) and 1991 (-1.4). A trough is the lower point of a business cycle, where contraction ends and expansion begins. The trough occurred in 1991. An expansion describes a speedup in the pace of economic activity, which occurred between 1992 and 1994, from 0.2% to 4.3%. In addition, if a contraction is long, which the GDP is negative for two successive quarters, then it will be described as a recession. It occurred between 1980 - 1981 and 1991 – 1992.
The diagram on the right is used to interpret the concept of the business cycle.
As the business cycle and the economic growth is fluctuate. Here are the challenges that UK and the world’s economy are facing:
- Maintain the long-term growth
- Steady the business cycle
- Lower unemployment
- Keep inflation low
- Prevent trade deficit
In fact, they are also the main effects of the changes in growth which UK experienced during 1985 and 2005. Here are the examples:
During the late 1980’s, as the ‘Lawson boom’ occurred which interest rate was low and an increased in the house prices, made UK’s economy experienced an expansion and the peak occurred in 1988. There were more consumption and therefore more outputs were produced, as the firms produced more and made profits, also due to the low interest rates, more money was borrowed and invested in the firms, these factors allowed them to give the employees better wages so they had more to spend. It also created more jobs as the unemployment rate went down, from 1986 (11.77%) to 1990 (5.72%). However, the problem is it caused high inflation, from 1987 (4.16%dRPI) to 1990 (9.44%dRPI), by the autumn of 1990, RPI inflation had gone up to 10.9%. The government had to raise the interest rate to slow down the economy, therefore the house prices fell and UK started to experience a recession between 1991 and 1992.
Due to the increased of the interest rate, UK’s experienced 2 years recession at the beginning of the 1990’s. There was less consumption as the growth rate of the real GDP reflects that, 1990 (0.8%), 1991 (-1.4%), 1992 (0.2%). There were less investments for the firms and there were less jobs as the unemployment rate went up, from 1990 (5.72%) to 1992 (10.22%). The inflation was went down, from 1990 (9.44%dRPI) to 1993 (1.57dRPI).
After the recession, UK enjoyed a recovery of their economy as the average of the real GDP growth rate between 1993 and 2000 is 3%. It could be explained that they have learnt from the experience and they do not want any ‘boom and bust’ happen to the economy any longer. The government had used policies to stabilize the interest rates, inflation, unemployment and exchange rate, etc. Examples of these are:
- In 1993, UK left the ERM due to the ‘Black Wednesday’ event and to prevent the devaluation of their currency.
- In 1997, Gordon Brown handed over day-to-day control of interest rates to the Bank of England which they are responsible for setting its base rate to keep inflation in the consumer price index very near to 2%. The policy is known as the monetary policy.
- Fiscal policy is used for setting and changing taxes, government spending and the government’s deficit and debt.
(3) To what extent can economic growth be explained simply as a function of time? What other factors might contribute to the rate of UK economic growth? Give reasons for your answer.
In my opinion, function of time can not be seen as the contribution to the economic growth, there are many factors that needed to be concerned, also as the previous assumption that I have made, government need to identify the economic problems and carry out policies to maintain the long term economic growth. In order words, time can only be seen as one of the requirements which allow these policies to carry out an effect which makes the economic growth.
In addition, what the government want is a steadily economic growth in long term, rather than a boom, it is based on the experience that once the economy has an expansion, it will go overheated and fell into recession. It is explained by the graph below as two gaps can be seen: An inflationary gap between 1986 and 1990 and a recessionary gap between 1990 and 1997.
The government try the best they can to smaller the gap between the actual GDP and the potential GDP, with the aim of maintain a steady economic growth. In order to ensure this happen, in the long run the government need to apply demand management, to raise actual GDP, e.g. adding to C I G X. On the other hand, they also need to apply supply-side management, to increase the potential GDP, in other words to get more output capacity so that the gap between actual GDP and potential GDP is minimize and there will be no more ‘boom and bust’ to the economy.
The improvement of the technological could be one of the factors that might contribute to the rate of the economic growth. New technology equipments could bring more productivity but it can be argued that it will also affect the unemployment rate as some of the jobs have been replaced and no longer existed. Also, as the change of the trend and the consumer’s preference, firms might produce products with high technology functions, e.g. cars, mobile phones, etc, to satisfy the consumers’ demand, and as a result it will increase the GDP output.
The firms’ competitiveness could be the other factors that might contribute to the rate of the economic growth. For example, in a competitive market, firms are using different strategic to make them better than their competitors. Some firms might do well and make profits, so they might offer better wages to their employees and as a result they have more to spend and consume more. Some firms might not do well, but then they might still want to stay in the market, money might be invest in the firms or specialists staff might be employed to improve the firm’s performance. They are related to the outputs, price and the unemployment rate and I personally think they are all considered to be the factors that affect the economic growth.
Finally the world’s economy growth could also be one of the factors. It is because the other countries‘s economic growth will affect the exchange rate, exports and imports and investments, etc. They are considered to be the factors that contribute to the rate of the economic growth.
Bibliography
Reading list
John Sloman, Essential of Economics, 2nd edition, 2001, Pearson Education Limited
John Sloman, Economics, fifth edition, Pearson Education Limited
Parkin, Economics, International Edition, 6th Edition, Pearson Education Limited
Michael Parkin, Melanie Powell, Kent Matthews, Economics, Fourth edition, Pearson Education
David Begg, Stanley Fischer, Rudiger Dornbusch, Economics, Eighth Edition, McGraw-Hill Education
Michael Parkin, David King, Economics, Addison-Wesley Publishing Company Inc.
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