The UK, a leading trading power and financial centre, is one of the quintets of trillion dollar economies of Western Europe. During the days of the British Empire the UK economy was the largest in the world and the first to industrialise (or industrialize, ushering in the Industrial Revolution). Although it has declined in significance since, the UK is still the sixth largest economy in the world by both nominal GDP and purchasing power parity (PPP). The UK has the third-largest national economy in Europe measured by nominal GDP (after Germany and France) and the second -largest measured by PPP (after Germany). Its GDP per capita is ranked the 20th highest in the world in nominal terms and the 17th highest in PPP terms. The UK is a member of the Commonwealth Nations, the European Union, the G7, the G8, the G20, the International Monetary Fund, the Organisation for Economic Co-operation and Development, the World Bank, the World Trade Organisation and the United Nations. The British economy is made up (in descending order of size) of the economies of England, Scotland, Wales and Northern Ireland.
The economy is characterized by flexible consumption, expanding output and low levels of unemployment. The strong housing market, which is currently experiencing its peaks, has greatly contributed to the strength of the consumer consumption.
The manufacturing sector represents only a small portion of the GDP. The UK economy is typically characterized as being service oriented. Additionally, the United Kingdom is famous with its extremely well-developed capital market system. This has resulted in the banking and finance sectors largest contribution to the GDP.
The UK is one of the largest producers and exporters of natural gas in Europe, despite its service orientation. As a result a big portion of the country's GDP is contributed by this industry. Thus, a potential increase in the prices of energy will have a positive effect on the UK's oil exporters.
However, the UK is experiencing a trade deficit on its balance of trade statement, since it imports a large number of goods. Approximately 50% of the import and export activities of the UK are done with the EU, which makes the latter UK's biggest trade partner.
On the focus of attention is whether the UK should adopt the Euro or not.
HISTORY
Since the end of the Second World War, the structure of the UK economy has undergone a radical transformation. One might say that change was especially noticeable during the Atlee Government of 1945-51, which saw vast nationalisation of industries as well as the establishment of the Welfare State, and the Conservative Governments under Thatcher and Major (especially the former) from 1979-90, which oversaw a large privatisation and deregulation programme. Moreover, the UK's membership of the European Union and its participation in other international trading organisations has had an effect. In the late 1970s and early 1980s North Sea oil and gas also had an effect on the structure of the economy.
Over the past two decades, the government has greatly reduced public ownership and contained the growth of social welfare programs. Agriculture is intensive, highly mechanized, and efficient by European standards, producing about 60% of food needs with less than 2% of the labour force. The UK has large coal, natural gas, and oil resources, but its oil and natural gas reserves are declining and the UK became a net importer of energy in 2005. Since 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 particularly hard, due to the importance of its financial sector. 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 BROWN government to implement a number of measures to stimulate the economy and stabilize the financial markets; these include nationalizing parts of the banking system, cutting taxes, suspending public sector borrowing rules, and moving forward public spending on capital projects. Public finances, weak before the economic slowdown, deteriorated markedly during 2009, as did employment. The Bank of England periodically coordinates interest rate moves with the European Central Bank, but Britain remains outside the European Economic and Monetary Union (EMU).
The decline of manufacturing and the growth of the tertiary sector has been the most visible change. The largest sectorial change has occurred in the secondary sector. In 1964 this accounted for 40.8% of the UK's GDP, but, despite rising slightly in 1969, plummeted to 28.2%. The decline of manufacturing is the part of this sector that has caused the most contention. The primary sector as a whole in 1964 accounted for 5.8% of GDP. Although it declined over the next decade, reaching 4.2% of GDP in 1973, the discovery of North Sea oil caused to increase to 6.7%. By the recession of the early 1990s, though, it had plummeted to 3.9%, and by 1995 had increased only to 4.2%. When these figures are broken down, it is clear that the profits from the oil had dried up by 1990.
The structure of an economy is traditionally divided into three sectors, primary, secondary, and tertiary.
CHANGES IN THE UK ECONOMIC STRUCTURE
Index numbers of output at constant basic prices (1990 = 100)
1964
1969
1973
1979
1981
1990
2005
Primary
Agriculture,hunting, forestry and ï¬shing
55.0
59.0
69.5
71.3
81.2
100
103.5
Mining and quarrying
187.0
136.1
104.3
109.2
115.7
100
107.3
Coal and nuclear fuel
295.0
213.2
166.1
144.4
143.8
100
21.9
Oil and gas extraction
-
-
-
88.8
99.2
100
134.7
Secondary
Manufacturing
72.6
85.4
94.6
90.6
77.7
100
106.3
Construction
65.9
74.4
77.4
69.4
60.5
100
114.1
Electricity, gas and water supply
45.3
55.1
69.6
80.4
81.9
100
139.8
Tertiary
Distribution, hotels and catering, repairs
61.0
65.5
76.0
76.6
69.9
100
151.3
Transport and storage
60.2
66.7
79.3
81.5
77.9
100
152.2
Post and telecommunication
30.6
40.2
50.2
59.7
62.7
100
274.2
Financial, intermediation, real estate, renting and business activities
27.6
34.5
42.3
49.6
54.3
100
161.1
Public administration, national defence and social security
85.1
89.1
98.0
98.0
102.2
100
115.1
Education, health and social work
57.9
67.2
76.5
92.4
94.2
100
141.3
Other services
51.8
54.7
59.0
68.3
70.5
100
168.2
GDP
58.7
66.4
74.9
80.0
76.5
100
140.7
Production industries
62.6
73.3
81.4
87.6
78.9
100
107.2
Globalization, Trade Openness and Economic Growth
The Government's central economic objective is to achieve high and stable rates of economic growth and employment. Trade openness and globalization have an important role to play in raising the long-run rate of growth in the economy. Openness to trade strengthens the drivers of productivity by providing greater opportunities to exploit economies of scale; by exposing the domestic economy to greater competitive pressures; by rewarding innovation and providing access to new technologies; and by increasing incentives for investment.
The positive impact of globalization on the UK economy is noted in the OECD's UK Economic Survey, 2007. OECD suggests that a 10 percentage-point increase in trade openness translates into an increase of around 4 per cent in per capita income. According to the OECD, removing remaining trade barriers between the EU and the US could bring permanent increases in per capita GDP of up to 3.5 per cent.
Government is helping to ensure that all people, places and business are equipped to meet the challenges of the global economy, through targeted labour market policies, programmes aimed at regional regeneration and a dedicated manufacturing advisory service to aid business transformation.
UK Economy Sectoral Analysis
The United Kingdom comes under high-income OECD economies as to the classification made by the World Bank on the basis of income and region for the year 2006.
The United Kingdom is one among the 6th largest economy over the world and 3rd largest in Europe. The economy of the country is more stable in terms of its growth rate. Services sector plays an important role followed by the industries.
In the UK the sectors that contribute to the GDP are divided in to primarily into three sectors namely the Primary (Agriculture, coal, mining, nuclear fuel and oil), Secondary (Manufacturing, construction and electricity) and Tertiary (Hotels, distribution, telecommunications, real estate and education). Some of the major sectors that contribute to the GDP of the economy are listed below.
Agriculture, hunting, forestry, and fishing:
The production of about 60% of food needs by 1% of the labor force indicates that agriculture is intensive, highly mechanized and efficient. Major agricultural products in the country are cereals, oilseed, fruits, vegetables, cattle, poultry and fish. Important industries in the country are engineering, chemicals, electronics, motor vehicles, aircrafts, textiles, cloth and banking. The economy of the country largely benefited from the exports of metals. But as you could see in the graph below the contribution of the agricultural sector to the UK economy has been decreasing.
Manufacturing
The share of manufacturing in the UK economy has declined relative to the services sector. The service sector accounts for two-thirds of GDP, while manufacturing represents less than 20% of national output. UK was the first country to start industrial revolution and now the fall in share of manufacturing has been more pronounced than in most other industrialized countries.
Service industries
The service sector is the dominant sector of the UK economy, a feature normally associated with the economy of a developed country, and makes up about 73% of GDP. This means that the Tertiary sector jobs outnumber the Secondary and Primary sector jobs. The service sector is dominated by financial services, especially in banking and insurance. London is a major centre for international business and commerce
Education and Health Care
In the UK the majority of the healthcare sector consists of the state funded and operated National Health Service (NHS), which accounts for over 80% of all health care spending in the UK and has a workforce of around 1.5 million, making it the largest employer in Europe.
Financial and business services
The United Kingdom is the world's leading trading power and financial centre. The financial and business services sector as a whole accounts for over 70% of GDP, a reflection both of the traditional strength of the City of London and of the rapid growth in business services over the past decade.
Real estate
The UK property market boomed for the seven years up to 2008 and in some areas property trebled in value over that period. This sector includes letting of dwellings and other related business support activities. The paucity of finance available to homebuyers by the self-regulation of the banks following the collapse of the financial system in 2007 continues to contribute to a very much diminished demand for housing in the UK with sales volumes around half of the pre-crash level. With many sellers reluctant to drop their price, there is a chronic over-supply of housing on the market at prices in excess of demand.
Economic Growth of UK:
The 1980s saw a strong reversal of fortunes for the British economy with the advent of the government of Thatcher. Most state-owned enterprises in the industrial and service sectors, which since the 1940s had been nationalized, were privatized. As a result, the British Government owned very few industries or businesses by the mid 1980s. GDP fell 5.9% at first then rose to 5% at its peak in 1988, according to the IMF, one of the highest rates of any European nations as banks and other financial institutions in the UK enjoyed the liberalization of the regulatory structures and greater freedom to explore new investment vehicles with less oversight.
However, Mrs. Thatcher's modernization of the British economy was far from trouble free; her battle against inflation resulted in mass unemployment with the jobless count passing 3,000,000 by the start of 1982 and remaining above that level until the spring of 1987. This was largely due to the closure of many outdated factories and coal pits which were inefficient and no longer viable to keep open. Unemployment peaked at nearly 3,300,000 during 1984 but fell dramatically during the final three years of the decade, standing at just over 1,500,000 by the end of 1989. From 1989 until 2010, the average inflation rate in United Kingdom was 2.72 percent.
Another severe recession hit the British economy at the start of the 1990s, beginning in the summer of 1990 and lasting until the end of 1992. This recession was a global one, brought on by the savings in the United States of America, which caused the economy to shrink by 8%, while unemployment increased from around 1,700,000 at the start of the recession to nearly 3,000,000 at the end of it. The inflation rate reached a historical height of 8.5% in the April of 1991. The recession ended at the turn of 1993 and subsequent economic recovery was extremely strong. Furthermore, unlike the previous recession, there was a practically instant and substantial fall in unemployment. During 1993, the unemployment rate stood at 10.3%. The percentage of the working-age population
Employed since 1993 has risen in every year, from 70.4 per cent in 1993 to 74.7 per cent in
2001. The labour force changed very little, from 78.5 percent of the working age population
from 1993 to 78.7 percent in 2001. Moreover, both sexes and all ages participated in this employment gain.
GDP growth had briefly reached 4% in the early 1990s, gently declining thereafter. Peak growth was relatively anemic compared to past rates of growth, such as the 6.5% peak in the early 1970s, although over-all growth was more sustained than earlier. Annual growth rates averaged 2.68% between 1992-2007 according to the IMF,with the finance sector growth contributing a greater part than previously.
In 2007, the UK had the world's third largest current account deficit, despite significant oil revenues, according to the IMF. This was mainly the result of a large deficit in the trade in manufactured goods.
The UK economy grew 1.1 per cent in 2008, putting it at 187th in the world GDP growth rate league, compared to overall world GDP growth of 3.8 per cent and European Union GDP growth of 1.5 per cent.
In the second quarter of 2008, the economy finally endured a quarter of detraction. The previous 15 years had seen one of the highest economic growth rates of major developed economies during that time and certainly the strongest of any European nation. United Kingdom suddenly entered a recession brought about by the global financial crisis accompanied by rising unemployment which increased from 5.2% in May 2008 to 7.6% in May 2009. The unemployment rate among 18 to 24-year-olds has risen from 11.9% to 17.3%.
On January 26, 2010, it was confirmed that the U.K. had left its recession, the last major economy in the world to do so.
The global economy is slowing down, leading to lower exports and international trade. Certain sectors have been particularly badly hit by the financial crisis, estate agents, banks, construction industry. There will be increasingly a knock on effect to the rest of the economy. Due to these factors experts predict that unemployment may rise in UK.
Unemployment can be either demand side or supply side, structural, frictional and real wage.
In case of Demand side unemployment, the solution is fairly straightforward - increase aggregate demand. This can in principle be done through either fiscal or monetary policy, although at present in the UK monetary policy would be the normal method.
When unemployment was supply side, such as structural, meaning people did not have skills appropriate to today's job market, then it would be much harder for output to expand, and consequently more upward pressure would be put on prices. In this case, although output rises, the inelastic nature of AS (due to skills shortages) means that the main effect of the increase in AD is to push up prices. Therefore, supply side unemployment needs supply side solutions. Taking each type of supply side unemployment in turn.
Structural unemployment can't be solved by ensuring that available skills match available jobs. Although some elements of regional policy may be involved here, much of the emphasis will be on training. Recent initiatives in this area include:
Grants for firms taking on long term unemployed workers, to subsidize the higher costs of training
The creation of individual learning accounts which also subsidize the cost of training
The introduction of 'Action Teams' from autumn 2000 to help match unemployed people in the areas of highest unemployment to suitable vacancies in neighboring areas;
An extension of the New Deal programmes for 18-24s and 25+.
Frictional unemployment contains many elements, but the key problems are lack of information about jobs, and lack of willingness to accept work due to the poverty/unemployment traps. Recent initiatives include:
A 10% income tax band on the first £1500 of income, introduced in April 1999.
Increases the Working Families' Tax Credit, guaranteeing a minimum income of £214 a week from April 2001 for working families with a full-time earner.
From April 2001 no family earning less than £255 a week will pay any income tax overall.
Improved access to job information with a move to a national jobs register - job centers deal mainly with local vacancies.
Real wage unemployment
This occurs where real wages are forced up above equilibrium. In principle, solutions might include the abolition of the minimum wage, although there are incentive and equality arguments that might tell against such a policy. The main initiatives that have been taken in this area have been the various acts in the 80s and 90s designed to reduce the power of trade unions, such as the need for secret ballots and advance notification before strike action can be taken.
As recorded on 15th December, 2010, The unemployment rate stands at 7.9% - up 0.1% over the quarter. 29.125 million People were in work in August to October according to the labour force survey (LFS). The number of people employed was 33,000 lower this quarter but up by 219,000 from last year.
The government is taking essential steps to create a stable environment where businesses can flourish and create jobs - with those on benefits at the front of the queue to take them up.
The government is increasing the support available to people through both Job centre Plus and their new Work Programme which will revolutionize the way in which it helps the long term unemployed into sustained employment. Only with a successful economy will we be able to finally get Britain working again.
The inflation on the other hand rose to 3.3% in November 2010 from3.2 % in October. Food and non-alcoholic beverages, and clothing are the most significant drivers behind the increase in annual inflation between October and November. Annual inflation as recorded by the retail prices index (RPI) stands at 4.7 per cent in November, up from 4.5 per cent in October. The CPI rose by 0.4 per cent between October and November this year compared with a rise of 0.3 per cent a year ago. The 0.4 per cent 1-month change this year is a record increase for an October to November period. Between 1996 and 2008, the 1-month change between October and November varied between a fall of 0.2 per cent and an increase of 0.3 per cent.
The most significant upward contributions to the 1-month change in the CPI between October and November 2010 came from:
• food and non-alcoholic beverages: prices, overall, rose by 1.6 per cent, the largest rise for an October to November period on record. The largest upward effect came from fruit where prices rose by 7.5 per cent. The increase in fruit prices is towards the top end of the range for an October to November period but below the increase of 11.7 per cent a year ago
• clothing and footwear: prices, overall, rose by 2.0 per cent, a record rise for an October to November period. The largest upward effect came from garments
• furniture, household equipment and maintenance: this also showed a record rise for an October to November period, of 1.6 per cent. The largest upward effect came from furniture and furnishings where prices rose by 3.7 per cent.
The most significant upward contributions to the change in the CPI 12-month rate between October and November 2010 came from:
• food and non-alcoholic beverages: prices, overall, rose by 1.6 per cent between October and November this year compared with a rise of 0.6 per cent between the same two months a year ago.
• Clothing and footwear: prices, overall, rose by 2.0 per cent compared with a rise of 0.6 per cent a year ago. The main upward effect came from garments, particularly men's outerwear
• furniture, household equipment and maintenance: the main upward effects came from furniture and furnishings, where prices rose by more than a year ago, and major appliances and small electric goods, where prices rose this year but fell a year ago
• housing and household services: the main upward effect came from materials for maintenance and repair where prices, overall, rose by 2.3 per cent this year compared with 0.6 per cent a year ago.
Year
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
2010
3.50
3.00
3.40
3.70
3.40
3.20
3.10
3.10
3.10
3.20
3.30
2009
3.00
3.20
2.90
2.30
2.20
1.80
1.80
1.60
1.10
1.50
1.90
2008
2.20
2.50
2.50
3.00
3.30
3.80
4.40
4.70
5.20
4.50
4.10
At Present the UK economy is the fifth largest country economy in the world by real or nominal GDP, and the sixth largest by purchasing power parity (PPP). At the end of 2008, it was estimated to be US$2.279 trillion. The UK is the second largest economy in Europe. The next largest economy in the world, and the largest in Europe, is Germany, which is estimated at US$2.863 trillion.
Referances:
http://personal.lse.ac.uk/pissarid/papers/UK_unemployment.pdf
www.economicsalevel.co.uk/Revision%20sheets/Unemployment.doc
http://econ.economicshelp.org/2008/10/unemployment-in-uk.html
http://en.wikipedia.org/wiki/Economy_of_the_United_Kingdom
http://www.economywatch.com/world_economy/united-kingdom/bank-of-england-monetary-fiscal-policy.html
http://www.tradingeconomics.com/Economics/Inflation-CPI.aspx?Symbol=GBP
External sector
Being the world's largest economy both by nominal GDP and purchasing power parity over a period of time is not an easy task. Its per capita GDP is ranked 20th highest in the world in nominal terms and 17th highest in PPP terms.
In this section we would be discussing about Great Britain amongst following parameters:
Currency Management
Net flow of funds
Net Exports
CURRENCY
The pound sterling is the official currency of the United Kingdom. It is subdivided into 100 pence. Predecimalisation it was divided into 20 shillings and each shilling into 12 pence making 240 pence to the pound.
Conversion from silver to gold standard.
During the reigns of HenryVIII and EdwardVI the silver coinage was drastically debased, although the pound was redefined to the troy pound of 5,760 grains
(373 g) in 1526. In 1544, a silver coinage was issued containing just one third silver and two thirds copper.
Unofficial gold standard
In 1663, a new gold coinage was introduced based on the 22 carat fine guinea. Fixed in weight at 44½ to the troy pound from 1670, this coin's value varied considerably until 1717, when it was fixed at 21 shillings (21/-, 1.05 pounds)
Gold standard
During the Revolutionary and Napoleonic wars, Bank of England notes were legal tender and their value floated relative to gold. The Bank also issued silver tokens to alleviate the shortage of silver coins. In 1816, the gold standard was adopted officially, with the silver standard reduced to 66 shillings (66/-, 3.3 pounds), rendering silver coins a "token" issue (i.e., not containing their value in precious metal).
Establishment of modern currency
The Bank of England was formed in 1694, followed by the Bank of Scotland a year later. Both began to issue paper money. The pound scots had begun equal to sterling but had suffered far higher devaluation until being pegged to sterling at a value of 12 pounds scot = 1 pound sterling.
Bretton Woods
In 1940 the pound was pegged was pegged to the US dollar at an exchange rate of £1 = $4.03. However the currency was devalued to $2.80 succumbing to the economic pressure.
Free floating pound
The pound became a free float currency from 1971 onwards appreciating to $2.65.
Currency exchange value:
The pound and euro fluctuate in value against each other although there are correlations in their movements. Post financial crisis of 2008 the pound has depreciated at one of the fastest rates reaching a low of $1.35 per £1.
Currency Value
In 2006 the House of Commons Library published a document which included an index of the value of the pound for each year between 1750 and 2005, where the value in 1974 was indexed at 100. The document states: "Although there was considerable year on year fluctuation in price levels prior to 1914 (reflecting the quality of the harvest, wars, etc.) there was not the long-term steady increase in prices associated with the period since 1945". It goes on to say that "Since 1945 prices have risen in every year with an aggregate rise of over 27 times."
Fig: An index stating buying power of pound compared to 1971
Net exports
United Kingdom, recorded a figure of $351.3 billion in 2009 and ranked 10th in the world when it came to exports. Although the recession brought down the figure from $466.3 billion achieved in 2008, the economy was still helped by the amount of exports.
England's most common exported commodities are:
Manufactured goods
Fuels
Chemicals
Food
Beverages
Some of the other heavy exports to other countries include:
1. Medicinal, dental & pharmaceutical preparations
2.New & used passenger cars
3.Petroleum products
4.Precious metals other than gold
5.Civilian aircraft engines
Major export partners are:
US
Germany
Netherlands
France
Ireland
Belgium
Spain
Fig: exports to various partners
Top UK Exports
The following products are the leading UK exports
Drugs and medicines account for 4 of the top 10 U.K. exported goods.
Aromatic drugs (HTS code 2933997500) … US$3.2 billion (6.8% of total)
Medications for eyes, ears or respiratory system (3004909185) … $2.8 billion (5.9%)
Other motor fuels (2710111550) … $2.4 billion (5%)
Crude petroleum (2709002090) … $2.1 billion (4.5%)
Turbojet aircraft engine parts (8411919085) … $1.4 billion (3%)
Enriched uranium fluoride (2844200020) … $1.2 billion (2.5%)
Immune system suppressant drugs (3004909115) … $876 million (1.8%)
Scotch and Irish whiskies (2208303030) … $842.9 million (1.78%)
Heterocyclic compound drugs (2934993000) … $770.8 million (1.6%)
Medium-sized automobiles (8703230042) … $705.9 million (1.5%).
Among the top 10 exports from England, Wales, Scotland and Northern Ireland, sales of aromatic drugs to the U.S. were up by 92.8% from 2008. That represents the highest gain, although turbojet aircraft engine parts also spiked $1.4 billion from nil in 2008.
Top UK Imports
Below are the leading U.S. exports shipped to U.K. clients in 2009, based on dollar value.
The harmonized tariff schedule (HTS) code is shown within brackets for each product classification. The percentage to total U.S. exports is also shown inside brackets.
Non-monetary gold (HTS code 7108121010) … US$6.8 billion (15% of total)
Civilian aircraft and parts (8800000000) … $5.4 billion (11.8%)
Vaccines (3002200000) … $1.5 billion (3.4%)
Paintings, drawings and pastels (9701100000) … $1.3 billion (2.9%)
Immune system suppressant drugs (3004909115) … $824 million (1.8%)
Other medications in measured doses (3004909190) … $607.7 million (1.3%)
Enriched uranium fluoride (2844200020) … $604.8 million (1.28%)
Jewelry excluding silver (7113190000) … $542.5 million (1.2%)
Cardiovascular medications (3004909120) … $450.7 million (1%)
Platinum waste and scrap (7112920000) … $417.5 million (0.9%).
Among the top 10 imports, enriched uranium fluoride showed the greatest increase, up 442.5% over 2008.
Current account
The UK current account recorded a deficit of £9.6 billion in the third quarter of 2010, increased from a revised deficit of £5.2 billion (originally published as a deficit of £7.4 billion) in the previous quarter. The third quarter balance is equivalent to -2.6 per cent of GDP, compared to -1.4 per cent of GDP in the previous quarter.
The current account deficit widened as:
the deficit on trade in goods increased by £3.0 billion to £25.7 billion
the income surplus reduced by £2.3 billion to £7.5 billion
the deficit on current transfers increased by £0.4 billion to £4.5 billion
This was partly offset as the surplus on trade in services increased by £1.4 billion to £13.1 billion
Net Flow of funds
UK business investment abroad (Foreign Direct Investment - FDI) is surveyed annually by the Office for National Statistics (ONS), the government department responsible for collecting and publishing official statistics about the UK's society and economy. The investment figures are published on a net basis, that is, they consist of investments net of disinvestments by a company into its subsidiaries, associate companies and branches.
FDI for United Kingdom can be measured in three ways:
'Net direct investment abroad by UK companies' - a measure of annual net flows of UK investment money into overseas economies.
'Net international investment position - direct investment abroad by UK companies' - a measure of the cumulative value of UK business investments overseas.
'Net earnings from direct investment abroad by UK Companies' - a measure of net earnings repatriated from overseas economies.
Target Sectors
Although there are no restrictions in FDI inflow in UK the government has identified some key sectors like information technology, automotive, life sciences, renewable energy.
PREVAILING ECONOMIC POLICIES:
The economic policy of UK is being shaped by global financial crunch that has affected all the major world economies. As a result of this the quarterly forecasts are toned down and to a significant degree. This has necessitated the reduction in the volumes of production and manufacturing which is an alarming trend as far as David Kerns, the chief economist, British Chamber of Commerce, is concerned.
As a part of its economic policy, Bank of England has brought down its interest rates to 1 percent, thus bringing down the expenses of lending which in turn has led to easy availability of finance to business and common consumers. The UK economic policy has a new thing in line i.e., Quantative easing. This is a move initiated by Bank of England and would try to increase amount of money present in banking system of United Kingdom.
CURRENT MONETARY POLICY OF UK (2009-2010):
The Bank of England, in 2009, has already brought down the interest rates to a historic low of 1 percent which is believed to drop down to 0.5 percent. Further measures are needed and one of them is quantative easing. Quantative easing in simpler terms is printing up of more money. The amount of money that is expected to get pumped into the system is 150 billion Great Britain Pound (GBP).
The Bank of England's balance sheet will probably continue to grow as it shores up more banks and financial institutions with both capital injections and loans, and as it acquires government Treasury bills to help finance the stimulus package will attempting to limit the crowding out of private borrowers.
PURPOSE OF MONETARY POLICY IN UK:
To control inflation
To influence the economic activity
To influence the exchange rate
ROLE OF BANK OF ENGLAND
Issues coins and notes which in turn helps it to control the supply of money in the economy.
Banker to all commercial banks.
Lender of resort incase of any run on the commercial banks.
Issues and manages government debt. The B o E will sell bills to the private sector to raise money.
Sets the base interest rate which influences the mortgage rate and other commercial interest rates.
The external trade policy has been one of the success stories for the past forty years. It has played an important role fro opening up of markets for goods, services and capital, the expansion of world trade and the strengthening of international rules guaranteeing a "level playing field" for all the European states outside EU.
Time Line of the Trade Policies:
1910-1913: Despite growing competition, Britain remains the world's largest trading and merchant shipping nation. Free trade, a canon of British life for 50 years, is now under increasing political attack. Opponents favor imperial preference; a proposed system of lower duties for goods within the empire which they suggest will help tie the empire together, raise revenue, and protect British industry.
1914-1918: World war has a dramatic impact on Britain's trade policy. With sea lanes and vital trade routes under threat, the state seeks total control of the country's trade. Free trade, the holy grail of laissez-faire liberalism, is abandoned, and duties of up to 50 percent are imposed on luxury imports. The war's disruption results in Britain's overseas trade falling by one-third.
1919-1923: After the war, tariffs on trade, at home and overseas, are removed. Four years later, Stanley Baldwin, the new Conservative prime minister, pushes for the reintroduction of protectionism. It is such a key issue that it precipitates another general election. Free trade becomes a dividing line for the political parties, and the vote goes against Baldwin's plan.
1924-1932: In 1932 Britain's Conservative-dominated national government again forces the old debate over free trade and tariff reform. In a bid to secure raw materials and cheap food, Import Duties Bill 32 is passed, a 10 percent tariff imposed, and free trade killed off. In the same year, in Ottawa, Britain institutes imperial preference, establishing tariffs that favor Commonwealth imports.
1933-1944: Britain's trade deficit continues to grow as exports decline. World War II causes exports and trade to collapse. Germany's attack on the Atlantic sea lanes destroys millions of tons of shipping, devastating vital imports of food and raw materials. Britain fights to keep the routes open. In 1941 Britain and the U.S. sign the Atlantic Charter, expressing the ideal of free nondiscriminatory trade.
1945-1951: Britain emerges from the war stripped of two-thirds of its export trade. It has nothing to export and no way to pay for imports. America's loans require that the pound be made freely convertible. The independence of India marks a retreat from empire that forces an adjustment to new trade networks.
1952-1958: Britain's share of world trade falls by about 1 percent per year. By 1952 the European Coal and Steel Community is under way, but, failing to grasp its significance, Britain is uninvolved. Churchill sees the U.S. as the basis of Britain's prosperity. When the European Common Market is born in 1957, Britain again stays out, thus cut off from the astonishing growth of European production and trade.
1959-1967: In 1959 Britain and six other nations set up the European Free Trade Association (EFTA) to rival the Common Market. EFTA aims to help Britain's way into Europe without damaging the Commonwealth trade agreements, still a key part of the nation's trade policy. When Britain does attempt to join the renamed European Economic Community (EEC), France vetoes its entry.
1968-1973: In the face of the continuing balance-of-payments crisis, Prime Minister Edward Heath launches Britain's third entry bid to the EEC in 1970, hoping that European integration will stimulate recovery. Britain's admission in 1973 requires the acceptance of the higher food costs of the Common Agricultural Policy and gradual prohibition of cheap food imports from the Commonwealth.
1974-1978: Joining the EEC causes a major reorientation of trade flows, but despite renegotiating the terms of EEC membership in Britain's favor, membership is still a hotly debated issue within the Cabinet. A national referendum is called in 1975, causing a great split in government. The public, however, votes overwhelmingly in support of staying in.
1979-1989: In 1979 Margaret Thatcher argues that because of Britain's other trading interests, including those with the Commonwealth, its tariff contribution is disproportionately large, and that Britain is becoming a net contributor to the budget of the EEC. In 1984 she secures a substantial rebate from the EEC.
1990-1996: BSE, commonly known as "mad cow disease," leads to a ban in 1990 on beef imports from France, Austria, West Germany, and the USSR. The Maastricht Treaty in 1992 commits members of the EEC to closer political and economic integration. Following Britain's withdrawal from the Exchange Rate Mechanism (ERM) and sterling's collapse in 1992, exports start to increase, and recession starts to fade
1997-2001: Trade with Europe increases, but the U.S. remains Britain's largest export market and second largest supplier. Trade remains key to the economy, with the value of imports and exports representing nearly half its GDP. Export growth produces the first balance-of-payments surplus in more than a decade. The Labor government pursues a policy of trade liberalization and plays a key role in trade talks.
2002-2003: The UK trade deficit reaches its highest level ever (though not as a proportion of GDP), due to the manufacturing recession and the global slowdown. Debate is keen as to whether Britain should adopt the euro. Britain's trade with the euro-zone has been declining, while euro members' trade among themselves has increased, and many in British business fear isolation and loss of markets.
CURRENT FISCAL POLICY OF UK (2009-2010):
"Golden rule of fiscal policy" was adopted during Gordon Brown's period as a Chancellor. The Golden Rule states that over the full economic cycle, the government should borrow to invest only for future needs. Current needs should be met by tax revenues. This should allow for stable finances as defined by the ratios of public sector net worth, debt and current expenditure to national income.
The UK also follows the "Sustainable investment rule", which would keep the national debt at a prudent level currently set at 40 per cent of GDP. This rule is considered to be broken as the public debt is estimated to be 42% in 2008 and would rise to 70% of GDP by the end of 2010. The justification is that a severe recession needs Keynesian stimulus to revive it, and that balancing the books should only be sought once the economic recovery begins.
Expensive infrastructure developments without running up debts can be done by the Private Finance Initiative. Rather than borrowing to fund new projects, John Major's government entered into a long-term leasing agreement with private contractors. Here companies borrow the cash to build and run new hospitals, schools and prisons for a period of up to 60 years. Till now there had been 150 PFI contracts have been signed which is worth more than £40bn. PFI is often portrayed as using private money to pay for improvements in public services. It is not new money. Private finance is more expensive than public capital. The government of the day may feel it is getting a hospital or school at a bargain price but the country will pay more in the long run.
Conclusion:
While concluding the two questions that I would wish to pose it that what would be the effects if the Euro is either adopted or not by the UK. Towards the end we would also see that what sought of a spider man mess the UK economy is in and why is it the actual sovereign debt crises.
Why the Euro Should Not Be Adopted by the UK
One of the major reasons is that there are examples coming from the past that such currency unions have collapsed. Additionally, the resulting connectivity of the countries that use the Euro will lead to changes in the economic conditions of other countries when one of the EMU members experiences negative changes in its economy.
Opponents of the Euro adoption are also reluctant toward the idea of transferring domestic monetary authority to the ECB (European Central Bank).
The lack of monetary flexibility will require greater flexibility in the labour and housing markets, which is not viewed as a positive consequence by many experts. Additionally, large transaction costs will be incurred in order to adjust to the new currency.
Finally, the UK government doesn't meet the idea of adopting the Euro very enthusiastically, because it has managed to set macroeconomics policies that have led the UK to its way of becoming one of the leading economies in the world.
Why the Euro Should Be Adopted by the UK
The adoption of the Euro will lead to reduced uncertainty regarding exchange rates. Additionally, it will reduce the transaction costs or risks that UK businesses incur.
It is believed that long-term interest rates will be potentially reduced and economic growth will be stimulated under the governance of the ECB. There will be higher price transparency. Additionally, greater capital allocation efficiency will be achieved through the integration of the national financial markets operating within the EU.
Another argument in support of the Euro adoption states that this currency represents the second of importance (after the USD) reserve currency.
There has been a sea change in the GDP and outputs of the countries that form a part of the EU which is depicted in the graph below.
