• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month
  1. 1
  2. 2
  3. 3
  4. 4
  5. 5
  6. 6
  7. 7
  8. 8
  9. 9
  10. 10
  11. 11
  12. 12
  13. 13
  14. 14
  15. 15
  16. 16
  17. 17
  18. 18
  19. 19
  20. 20
  21. 21
  22. 22
  23. 23
  24. 24
  25. 25
  26. 26
  27. 27
  28. 28
  29. 29
  30. 30
  31. 31

The Impact of Domestic Policies on UK Investments & Exports During the Financial Crisis (1970 - 2011)

Extracts from this document...


´╗┐The Impact of Domestic Policies on UK Investments & Exports During the Financial Crisis (1970-2011) How Did Corporation Tax, Bank Rate & Value Added Tax Revisions Impact Inflation? How Did the Resulting Inflation Impact UK Exports & Investments Vis a Vis Economic Growth in the UK? W12313055 Word Count: 2,994 (Excluding Tables & Appendices) Abstract ________________ This report examines the impact of the following policy reforms on the aggregate economy in the United Kingdom, during the financial crisis: A reduction in corporation tax (2008), a reduction in the bank rate (2009) and an increase in value added tax (2011). Firstly, an overview of historic economic events affecting the UK economy during 1970 to 2011 is given. It is found that oil ?shocks? during the 1970s were a major impact on the UK economy, with inflation at its highest and GDP growth at its lowest. During early stages of the 1990s, an end to the British membership of the exchange rate mechanism caused high interest rates, falling house prices and an overvalued exchange rate, therefore, leading the UK into a recession. Following this event, the 2008 financial crisis triggered by the global ?credit crunch? plunged the UK back into a deep recession, with poor economic growth, high inflation and high unemployment. The resulting inflation caused by the crisis is then discussed in depth, examining the impact that the financial crisis and policy reforms had on prices in the UK. It is found that sharp rises in electricity and gas prices were the primary reasons for high inflation during the crisis years (2008 to 2011). It was also found that a reduction in the corporation tax and the bank rate both encouraged investments and consumption, which in turn created a positive impact on UK exports. However, increases in VAT directly led to a reduction in investments and consumption, as well as UK exports. The impact of inflation on investments in the UK showed that a rise in prices evidently discouraged businesses and consumers to invest in capital goods or further investment projects. ...read more.


This was reflected by inflation growth rate remaining generally flat during this period (Chart 3.2a). Alternatively, businesses may have used extra net profits to pay higher dividends to shareholders. Shareholders? gains increased as a result, and so the psychological impact of feeling ?wealthier? may have encouraged shareholders to spend or invest more. These sudden consumption boosts may have also increased aggregate demand to the stage that demand outweighed output, forcing businesses and retailers to increase their prices, to reduce demand. Due to inertia, the effect of this may have actually contributed during 2010-11 (Chart 3.2a), where significant rises in inflation was observed once again. Another perspective is that a lower rate in corporation tax may have also increased UK international competitiveness in terms of business and investments. A lower rate encouraged international investors to ?set up? businesses in the UK, and so increasing inward investments. The rise in investments and so consumption may have also pressured prices upwards, due to rising aggregate demand. However, this impact may not have been instantaneous. This indirect impact from a corporation tax reduction may have in fact taken place during 2009 to 2010-11, where significant rises in inflation reoccurred (Chart 3.2a). Impact of Bank Rate Reduction on Inflation ? 2009 2009 A bank rate is the rate of interest that the central bank lends money to domestic banks. As stated previously, soaring prices during 2008 called for a reduction in the bank rate from 1.0% to 0.5% in 2009, in order to lower borrowing costs and so to stimulate consumption and investments. Impact This proposed lower borrowing costs for borrowers and spenders, due to the rate of interest on repaying loans being lower; this may have instantaneously contributed to the collapse in the level of prices during 2009 (Chart 3.2a). Presumable, this increased business spending on capital goods such as machinery, and so investments in the UK increased. ...read more.


Although consumption in the UK was expected to be affected, adverse effects on UK exports and investments were the prime affected components that reduced economic growth in the UK. A reduction investments resulting from the increase in prices and so a fall in aggregate demand, was primarily due to uncertainty surrounding the rate of return that investors would retrieve from investing in capital goods. Sharp price rises in domestic goods also discouraged foreign buyers from purchasing domestic goods and so exports fell rapidly. 3. A rise in imports further deteriorated exports, as domestic consumers were encouraged to purchase cheaper foreign goods. The sharp declines in consumption due to rising prices therefore put pressure on the government to intervene through transfer payments, in an attempt to boost disposable income. Further interventions were through policies announced during 2008, 2009 and 2010. A reduction in the UK?s corporation tax rate (2008) stimulated investments somewhat, as the additional retained profits enabled businesses to invest further or pay higher dividends to shareholders. Rising investment in construction and manufacturing sectors, contributed to the periods of rising UK exports. 4. This had a gradual contribution to the years of rising economic growth in the UK. A reduction in the bank rate (2009) further increased chances of an increase in investments, due to lower borrowing costs; this also increased investments on capital goods. This stimulating factor created a positive effect on consumption, investments, net exports and so aggregate demand. These were all major drivers in encouraging the UK?s GDP growth, particularly during the crisis years. An increase in VAT (2010) caused an expected adverse multiplier effect on all components of aggregate demand vis a vis the UK?s economic growth, due to the additional costs. 5. Ultimately, volatility in prices altered pricing mechanisms and so resources were not allocated efficiently, due to businesses and consumers having little information on the level of prices to make reasonable choices when purchasing or supplying products. As a result, lower consumption, exports and so investments, were the major contributors to the shortfalls UK?s GDP growth vis a vis economic growth. 9. ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our University Degree Macroeconomics section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related University Degree Macroeconomics essays

  1. Marked by a teacher

    Factors Which Effect Interest Rate Developments Within The United Kingdom

    3 star(s)

    It must also be noted that although those homeowners with fixed rate mortgages will not be effected to the same extent, the effect that interest rate changes can have upon those with variable rate mortgages is a phenomenon particular to the UK economy as in the majority of European nations

  2. The current economic crisis has resulted in a recession. Discuss, taking account of ...

    known as aggregate demand, and the effect that this has on output and inflation. The Keynesian theory was proposed when a group of economists sat down together, many years ago, and took all the parts from the monetary policy that they thought were right, and all the parts from the fiscal policy that they believed to be true.

  1. Both supply and demand shocks can cause inflation, but, without money growth the inflation ...

    It could be increasing because of increased government spending (G), or as a result of increased consumer confidence therefore increased consumer spending (C). If aggregate demand increased, then the aggregate demand curve shifts right, thus resulting in an increase in real GDP and price level, the price level increase being the inflation.

  2. Discuss the role of government policy in reducing unemployment and inflation

    (Blink, 2007) According to this, unemployment (equilibrium) can be classified in three types. Frictional unemployment is a natural unemployment that appears when people are changing one job to another, waiting to get employed after university or army etc. This might occur as a result of unemployment benefits in certain country that doesn?t push people to seek jobs.

  1. Economics Questions on National Income, Aggregate Demand and Business Cycles.

    Investment & Consumption of non-durable goods are less affected. 5. Immediate effect on the level of inventory stock. 6. Profits fluctuate more than any other incomes. Booms/recessions can be generated by rise/fall in government expenditure, fiscal policy. Similarly, a wave of optimism/pessimism can cause consumers to spend more/less than usual.

  2. The purpose of this coursework is to study the characteristics of inflation in the ...

    With such inflation occurs conditional balance of losses and gains (tab.1.1). Table 1.1 - The balance of losses and gains in a period of inflation Possible Losses Possible Gains 1. Employees, where the salary stipulated for a period. 2. Loans that provided long-and medium-term loans at fixed interest.

  1. "Can financial markets ever be considered to be truly efficient; given that insider trading ...

    The semi strong form says that current security prices instantaneously and full reflect all publicly known information about the securities markets. If this hypothesis holds true, then when any new information becomes public knowledge, its quickly incorporated into security prices.


    by the RBI and the government of India to frame monetary and fiscal policy, etc. The WPI is the chief measurement index in India. In most other countries CPI is used as a chief index. The WPI in India is used to deflate national income and to calculate real output in the economy.

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work