The UK economy and Tesco's Positioning

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The UK is one of the largest macroeconomys in the world. It is seen to be one of the strongest and most stable economies at the present time, which from the evidence in this discussion seems set to stay for the future.

Economic growth

The definition of economic growth is an increase in Real GDP (gross domestic product), which is usually calculated annually. Therefore in order to calculate economic growth, GDP, which is the total value of production in an economy, needs to be calculated. There are three ways of doing this, the expenditure method, the income method and the output method. There are small discrepancies between the values of GDP using each method, and so in the UK the official measurement used by the government is an average of all three methods.

The below graph shows the economic growth rate since 1980.

Figure 1

Source data: IMF, World Economic Outlook Database, September 2006

As we can see, in the early 1990s, the UK suffered from a recession, as economic growth was negative for more than two consecutive quarters. Between 1991 and 1992, the economy actually shrunk, and real GDP fell. This can be linked to other leading indicators, which will be considered later. However, since this time the UK has achieved steady and sustainable economic growth, which has been one of the highest rates in Western Europe, allowing the UK to be competitive. This economic growth has probably been aided by an expansion in the labour market, due to the influx of migrants into the UK. The government is expected to exceed its target of 2.75% growth this year, and this is likely to continue for the foreseeable future. It would seem that this can only be positive for the UK economy, improving individuals’ standards of living and helping to increase confidence in the economy, increasing investment and therefore increasing aggregate demand. However, economic growth also has costs. Inflation can be caused if the increase in Real GDP exceeds the rate that aggregate supply can increase, which can be seen on the diagram below.

Figure 2

If Long Run Aggregate Supply cannot increase, then the inflation rate will rise, which can cause many problems for the economy. The UK will need to be careful that this does not happen, as inflation has been on the increase, which I will now look at.


Inflation is the annual percentage increase in prices. There are a number of ways of calculating inflation; in the UK the two main measures used are the CPI and the RPI.

Today the UK inflation target is based on the Consumer Price Index (CPI), which was previously called the UK Harmonised Index of Consumer Prices (HICP). The CPI inflation target is set at 2%. The Retail Price Index (RPI) is still published; it differs from the CPI as it includes a number of extra items, mainly related to housing, including council tax and mortgage interest payments. I will be examining data from both measures as the CPI has only been used since 1997.

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Figure 3

Source data: ONS

As we can see, in the past, the UK economy has had problems with very high levels of inflation in the past, especially in the 1970’s which was caused by massive oil price rises. The inflation rate rose sharply in the early 1990’s, nearly reaching double figures again. This could have caused the negative economic growth and the recession in the economy seen on Fig 1. However, since then the UK economy has achieved a steady inflation rate, that until recently has been below the Bank of England’s of 2% for ...

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