The Current Performance of the UK Economy

To assess how successful a country’s economy is we have to look at a number of factors, these include: Unemployment, inflation, Economic growth, trade, exchange rates and Interest rates. The ‘ideal’ for a country is normally to have low unemployment, low and stable inflation, an avoidance of excessive exchange rates changes, steady economic growth and trade surplus rather than a trade deficit.

Unemployment is defined as ” a broad term to describe those willing and able to find work but unable to obtain a job”. One of the measures of unemployment in the UK is called the ‘claimant count’. It is based upon the number of people who are claiming unemployment benefits. It has the advantage that it is quick and easy to construct because it is based of information already collected by the government. However, it is often criticised for being inaccurate, not all of those out of work will claim benefits, and some of those out of work are not actively seeking a new job (although this is carefully checked). People claiming the benefit may have another job and therefore be claiming the benefit illegally.

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A number of ‘groups’ of people who are looking for employment but are unable to find it also do not appear on the government lists. The list only includes people between 18 and 60, if you don’t belong in this age bracket then you are not officially recorded as being ‘unemployed’.

Another method of measuring unemployment is the ‘Labour Force Survey’. This uses the International Labour Organisation definition of unemployment which includes ‘all people of working age who, in a specified period, are without work but available for work in the next two weeks an who are seeking paid employment.’ Since April 1998, this survey has been given greater prominence whilst the claimant count has been downgraded. The measure is based upon a survey, which is carried out four times a year. It also collects more information on things such as ethnic origin. Qualifications and those seeking part time rather than full time employment. It also has the advantage that because it uses an international definition of ‘unemployed’ the unemployment rates in different countries can be more accurately compared. Unfortunately it is expensive, time consuming and as it is based on a sample survey it is subject to sampling error.

Unemployment in the UK in June 2001 stood at 5% (down from 5.5% in June 2000). In 1987 3 000 000 people were unemployed in the UK, of this number, 1 200 000 were female and 1 800 000 were male. Between 1987 and 1990 unemployment fell to 2 000 000 people of whom about 1 100 000 were male and 900 000 were female. Unemployment rose again between 1990 and 1993 to 3 000 000 before steadily falling to about 1 800 000. Between 1987 and 1998 unemployment among females stayed fairly steady, at an average rate of just under 1 000 000, it is the male unemployment figures which have dictated the overall trend for the UK.

Unemployment for June 2001 was 5%, this was down 0.5% on June 2000. This figure is 3.3% lower than the ‘Euro area’ (8.3%), 3.8% lower than France (8.8%) and 4.3% lower than Germany (9.3%), so when compared to Europe the UK unemployment rate is relatively low. It is currently the same as Japan’s but 0.5% higher than in the US.
One of the main measures of inflation in the UK is the Retail Price Index (RPI). The RPI measures the changes in the prices of consumer goods. The Office of National Statistics (ONS) calculates the RPI in three phases. Firstly they find out a family expenditure survey to find out what people buy and how much the pay for them. About 7000 households are asked to record what the buy and the cost of it over a two week period. These households are drawn from across the country from different socio-economic groups. Low income pensioners and the top 4% of income earners in the country are excluded form this survey because they would buy radically different things for different amounts than the rest of the country. The ONS then ‘weights’ the items people buy, e.g.: if someone spends 500 in a month and 100 went on food and 10 on cigarettes then food would be given a weighting of 1/5 while the cigarettes would be given a weighting of 1/50. The weights are changed each year to show changes in spending patterns.

The second phase is calculating the change in the prices of about 600 selected items. These includes supermarket goods, rail fares and electricity bills. In total approximately 150 000 prices are collected each month. When they have been collected an average price is calculated for each item in the index.

The data is fed into a computer and the percentage change in price for each item is multiplied by its weight.

There are currently 14 main categories in the RPI, these include: food, clothing and footwear, tobacco, housing, leisure services and fuel and light. The total of the weighted price changes for each of the items gives the RPI which represents the average change in the price of millions of consumer purchases.

There are problems in gaining an accurate picture of inflation.
Changes in quality may rise dramatically while the price of an object remains relatively stable. The consumer is therefore getting more for his money. A good example of this is computers. In 1994-1995 and ‘good’ computer cost between 1000 and 1500, in 2001 a ‘good’ computer costs a lot less. The quality of these computers is radically different. A 2001 computer has more memory and is much quicker than a 1995 computer. It runs using windows 98 or the latest millennium version of windows. In effect its ‘real’ price has fallen even more than its nominal price.

Price indexes ignore special offers in shops and also ignore car boot sales and prices in charity shops so people may be buying things for cheaper than the indexes suggest.

The indexes are only changed once a year but consumer spending changes much more frequently than that.

The graph below shows how inflation over the last 20 year has fallen:
The RPI rose by 1.6% between July 2000-July 2001. This was down from a 1.9% rise between June 2000- June 2001.

GDP (Economic Growth):
When looking at economic growth it is important to realise the difference between ‘actual’ and ‘potential’ growth. Actual growth is the percentage increase in national output. When statistics are published it is actual growth which they are referring to. Potential growth is the speed at which the economy could grow. It is the percentage annual increase in the economy’s capacity to produce. Two of the main factors contributing to potential growth are and increase in resources (natural, labour or capital) and an increase in the efficiency with which these sources can be used, e.g., through technological advances.

To measure the rate at which a country’s economy is growing we use GDP (“the value of output (or income or expenditure) in terms of the prices actually paid. “). The production of a good leads to people getting paid. People getting paid means they have incomes. When people have incomes they spend them on good. More goods are needed so more are produced, which means people get paid, and so on.
The product method of measuring GDP is to add up all the goods and services produced in a country industry by industry. Britains GDP in 1998 (at market price) was 843 725 000 000.

Two other methods of calculating GDP are the income method and the expenditure method. Either way will give the same total as the others because production = income = expenditure. Britain’s GDP in 2001 is up 1.4% in a quarter and up 2.1% in a year.

The exchange rate is the amount of money that must be exchanged in one currency to get a certain amount in another. For example: to get 10FF would cost about 1, to get 10DM would cost about 3.50. 1 US dollar is worth 0.69, 2.15DM or 7.21FF. How much a certain ‘currency’ is worth is dictated by how much people want to buy items from that country. To put it on a metaphorical level: you are in a country where umbrellas can only be bought using special umbrella dollars (U$). While it is nice, hot and sunny 1 will buy you 10U$. Suddenly a weather forecast comes through saying that rain is on the way, the money changers can’t be sure of rain but they reduce the amount of U$ you can get for 1 to 7U$ just in case. The Forecast turns out to be right and it does start raining and everyone wants umbrellas, so the money changers decide to cash in on this and say that 1 Is now only worth 5U$, when it stops raining you can get 10U$ for 1 again. If you say the umbrellas are representing the country’s products then we can see how ‘supply and demand’ influences the exchange rate.

The pound is currently quite strong and while this is good for tourists (who get more foreign currency for each pound) it is not so good for businesses in the UK who want to export their goods to the rest of the world because it makes them more expensive. If the pound was weak then the tourist would suffer but businesses would be better off.

A country’s trade-weighted exchange rate is a ‘measure of the price competitiveness of its exports’ the Euro has gained competitiveness in recent years: it has jogged between 80% and 90% of its January 1999 value for over a year. The dollar and sterling have remained high.

International trade is the swapping of goods, services or raw materials from one country for goods, services or raw materials from another. Trade has the potential to benefit all the participating countries, but to different extents. Totally free trade often brings problems, e.g.: Textile workers might be worried if there was completely free trade because their jobs might be threatened by the import of cheaper cloth. From a consumer’s point of view, free trade is generally good thing because it leads to ‘price wars’ as many different companies selling very similar products try to attract customers. If there is no free trade companies will benefit more than consumers will because there will be less competition. Over the last century trade has been made freer between most countries and the formation of trading blocs such as the EU and NAFTA have helped this even more.
When a country is buying more than it is selling there is a ‘trade deficit’. The current trade balance in Britain is -$44.9bn. For Germany it is +$57.2bn, France has ‘broken even’ and currently has a trade balance of ‘nil’, the Euro area as a whole has a trade balance of -$1.2. This would seem to suggest that we have a large trade deficit. Large trade deficits may result in unemployment and a reduction in economic growth in the country with the deficit.

An interest rate is the amount of interest charged on a loan or given to savers. E.g.: if you borrow 1000 from the bank at a rate of interest of 5% then you will pay back 1050 in total. Equally, if you put 1000 in a bank account where you get 5% interest then you will eventually end up with 1050 at the end of the year.
Interest rates on government bonds on the 29th August 2001 were 4.81% in Britain. This was down from 5.32% a year ago. This is similar to the rest of the world except for Japan where the interest rate on a government bond was 1.87% and is now 1.35%.

In general the British economy is doing well. Britain has a low level of unemployment, both compared to the last 20 years and compared to the rest of Europe. She has a low level of inflation, which is still on a downward trend. Compared to the rest of Europe and Japan our current trade deficit is large, out of the EU countries, Australia, Canada, United States and Japan ours is the second highest at -$44.9bn, the only country to have a higher deficit is America herself at -$453.5bn. Most of the other countries currently have a trade surplus. Our GDP is average, just below the level for the Euro area. The pound is strong against the Euro and climbing back after a sharp fall against the dollar. Overall, the current economic performance of the country is good.