4 Questions on Business economics, 250 words per question Essay Example
Business Economics Assignment
Q2. ‘Low economic growth is usually accompanied by rising unemployment’. Explain why, in a period of low economic growth, unemployment is likely to increase.
Unemployment refers to a defect in the economy that affects community structures (Al-Habees & Rumman 2012:673). Economic growth refers to an upward change in the quantity of goods and services by a population for a period (productivity). There is a significant link between unemployment and economic growth.
Periods of low economic growth reduce the rate at which aggregate demand increases. This slowed aggregate demand has an impact on the gross domestic product of a region reducing personal consumption expenditure and business investments. Slowed aggregate demand means that consumers, government and businesses are unwilling to spend. This insufficient spending reduces the rate of investments and creation of new jobs, thereby decelerating economic growth. When this growth rate decelerates for long periods such as 12 months or more, it causes an increase in unemployment since productivity does not match with output. When individual output increases at a faster rate than growth of output, employment is likely to fall (Al-Habees & Rumman 2012:673). Again, slow economic growth would reduce the competitiveness of manufacturing firms or industries hence lower the value of exports and increase the value of imports. Reduced exports would affect industry performance leading to structural unemployment. The aggregate demand diagram in figure 1 shows that a slow increase in aggregate demand would cause an increase in negative output gap while growth is depicted by a rightward shift of the LRAS curve than the aggregate demand curve. The arrow between AD1 and AD2 depicts the change in the size of negative output gap.
Figure 1. An Aggregate Demand Diagram.
Q4. ‘The deficit on the current account of the balance of payment was lower in 2011 than it was in 2010.’ Explain two factors other than a fall in the value of the pound, which might help to reduce the size of the deficit on the current account of the UK balance of payments.
A deficit on the current account occurs when the import volumes are greater than the export volumes (Carbaugh 2012:340). This means that inflows are greater than outflows. The current account of balance of payments in the United Kingdom has been on deficit since the 1980s. The deficit on balance of trade in goods and services in 2010-2011 declined from £42.7 billion to £39 billion while the current account deficit increased £4.66 billion to end the year at £36.7 billion (Office for National Statistics 2011). Two factors for reducing the size of this deficit are deflation and reducing government budget deficits.
Deflationary concept refers to tightening fiscal policy of an economy by increasing interest rates. The UK government could increase interest rates to reduce household and business spending (Carbaugh 2012). Reduction on spending would reduce the aggregate demand for imports. This would lower inflation and improve the competitiveness of UK exports by pressurizing UK manufacturers to reduce export costs. These changes would reduce the current account deficit but increase the risk of unemployment.
Lowering government budget deficit can also reduce the current account deficit by imposing tax hikes, cutbacks on government programs or tariffs on quotas to reduce imports (Carbaugh 2012:340). The tariffs would lower demand thereby lowering the volume of exports. These actions would have a positive effect on the current account. The drawback of tariffs and tax hikes is that domestic manufacturers would lack incentive to produce and become less competitive.
Q5. ‘Economic policymakers hope that UK trade with the rest of the world will help to rebalance the economy and boost aggregate demand.’ Using your economic knowledge, assess the impact on the performance of the UK economy of a significant increase in exports and a reduction in imports of goods and services.
The performance of the UK economy can be measured using indicators such as current account balance, inflation, the living standards of the population and unemployment. Rebalancing refers to the realignment of weightings of asserts. This involves purchasing and selling assets in a personal portfolio. Rebalancing the economy refers to resurgence of industries to bring about economic growth. This may involve increasing business investment and improving net trade that can reduce debt caused by government and household consumption, thereby causing economic stability (Confederation of British Industries 2015).
An application of economic theory can demonstrate that the volume of imports and exports has an impact on the UK economy. Rebalancing through business investment would increase competitiveness in the manufacturing industry and increase aggregate supply of goods and services exported from the UK. This rebalancing could be caused by reducing the exchange rate, improving supply-chain activities or global economic growth. Rebalancing would lead to an increase in the volume of exports and reduction of current account deficit, therefore greater economic stability. As business investment increases and manufacturers become competitive, aggregate demand for imports would reduce thereby lower the volume of imports into the country. The decrease in inflows and increase in outflows would rebalance the economy by stimulating economic growth. This rebalancing is particularly significant as the country’s budget deficit needs to be reduced and consumption (domestic) needs to be controlled. High economic growth would increase structured employment in manufacturing industries and improve the current account balance. Sustained increase in employment would improve the living standards and help the country to achieve the objective of its macroeconomic policy.
Q6. ‘Most people would say that the ending of the BT telephone monopoly, and competition in the telecommunications market, as been beneficial. However, Britain’s railways show why some monopolies should not be replaced by a number of competing firm.’ Evaluate the view that consumers are always better off and producers are always worse off if monopolies are broken up to encourage as much competition as possible.
A monopoly refers to an enterprise where the seller controls the supply of a product or service. It occurs when a company owns an entire market and does not face any competition in the supply of a good or service to the market. The telecommunication industry is characterised by monopoly. BT became a monopoly company because it was the sole supplier for teephone services in the private sector telephone service. The Post Office Act of 1969 allowed the Post Office to retain exclusive ability to provide and run telecommunication systems (BTPLC 2015:1). This effectively created a monopoly in the telecommunication industry, which was later changed to accommodate competition from other telecommunication. This privatization was successful in creating value for the public. However, privatization of British rail has been a complex undertaking. The intention of British railways reforms was to create competition for passenger and freight services as well as engineering services (Glaister 2004:9). Consumers are better off in a monopoly because political compromises could affect the achievement of competition. British rails was worse off because successive British governments made a lot of compromises that weakened competition. Governments also failed to implement privatisation effectively because they were in a hurry to privatise without setting up alternative institutional mechanisms for the industry (Glaister 2004:9-10). This failure affects competitive market since many sellers are unable to services and have to duplicate fixed costs leading to lesser economies of scale. Another drawback for producers in a monopoly is that it does not allow infrastructure competition in service delivery that may create cost savings.
Al-Habees, MA & Rumman, MA 2012, ‘The relationship between unemployment and economic growth in Jordan and some Arab countries’, World Applied Sciences Journal, vol.18, no.5, pp. 673-680.
Bivens, J 2011, ‘Slow economic growth raising unemployment rate’, Economic Policy Institute, viewed 7 May 2015 <http://www.epi.org/publication/slow_economic_growth_raising_unemployment_rate>
BTPLC 2015, The history of BT, viewed 7 May 2015, <http://www.btplc.com/Thegroup/BTsHistory/History_of_BT.pdf>
Carbaugh, RJ 2012, International Economics, South-Western, Mason.
Confederation of British Industries 2015, Rebalancing the Economy, viewed 7 May 2015 <http://www.cbi.org.uk/campaigns/a-vision-for-rebalancing-the-economy/>
Glaister, S 2004, ‘British rail privatisation: Competition destroyed by politics’, Centre for the Study of Regulated Industries, vol. 23, pp.1-56.
Office for National Statistics 2011, Balance of payments, viewed 7 May 2015 <http://www.ons.gov.uk/>
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