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AS Macroeconomics / International Economy

Introduction to the UK Economy

What is macroeconomics?

Macroeconomics considers the economy as a whole and relationships between one country and others for example we focus on changes in economic growth; inflation; unemployment and our trade performance with other countries (i.e. the balance of payments). The scope of macroeconomics also includes looking at the relative success or failure of government policies.

Introduction to the UK economy

• The United Kingdom is one of the world’s leading advanced economies. It has the second largest economy in the European Union (EU) behind Germany and just ahead of France and it is the second biggest exporter of services in the global economy and ranked eighth in global exports of goods. In 2006 the UK will contribute 3 per cent to global output.
• In terms of per capita national income, the UK is ranked in the top fifteen nations of the world and in 2006 it is forecast that the UK will have a per capita income (PPP adjusted) of $31,529 some distance behind that of the United States and also Norway and Ireland, two of Europe’s richest countries.
• Britain has enjoyed a period of continuous growth that stretches back to 1992, the longest sustained expansion for over forty years. However, in 2005, real GDP grew by 1.8%, the slowest pace of growth for twelve years.
• Over 27 per cent of the UK’s GDP in 2005 came from exports of goods and services. Imports amounted to 31.5 per cent of national income leading to a large trade deficit in goods and services with other countries.
• The UK joined the European Economic Community (now known as the EU) in January 1973 and it is a founder member of the World Trade Organisation. The UK retains its own currency having decided for the time being not to consider entry to the EU single currency area, the Euro Zone.

The main sectors of the economy

• Households: receive income for their services and then buy the output of firms (consumption)
• Firms: hire land labour and capital to produce goods and services for which they pay wages rent etc (income). Firms receive payment. Firms invest (I) in new producer goods
• Government: collect taxes (T) to fund spending on public services (G)
• International: The UK buy overseas products, imports, (M)) and overseas economic agents buy UK products, exports (X)

Targets and objectives of macroeconomic policy

Government management of the economy is a key political issue and each government sets targets and objectives when it assumes power – and often, economic objectives and priorities lie right at the heart of a government’s overall political strategy.

We focus on large number when we undertake the study of macroeconomics. For example, the value of national output in the UK, expressed at constant prices so that we eliminate the effects of inflation on the value of what we produce and consume, edged above £1 trillion in 2003. But we still stand well below the United States, whose national output (GDP) accounts for over a quarter of world output each year. No wonder that people often say “when the United States catches sneezes, the rest of the world catches a cold!”

What are the main indicators we use when making cross-country comparisons of economic performance? Traditionally we have tended to focus on four key indicators of achievement. They are

• Growth: The rate of growth of real national output (i.e. real GDP)
• Inflation: The rate of price inflation (i.e. the annual percentage change in the price level)
• Unemployment: The rate of unemployment in the labour market
• Trade: The balance of payments in trade in goods and services and net flows of investment income – representing the effects of trade and investment between countries