Introduction to the UK Economy

1. Introduction to the UK Economy

2. How big is the UK economy? • The UK economy is the 7th largest in the world, with an annual GDP of around £1.35 trillion, or £1350 billion, or £1,350,000,000,000. • GDP means Gross Domestic Product, and this represents the value of all things made and all services supplied in an economy - all output. • If we divided the value of the economy evenly amongst the whole population, each person would receive around £21,000. This division is called GDP per capita, and on this calculation the UK is the 17th highest in the world. Some of the poorest counties in the world have a GDP per capita of less than £400!

3. The Business Cycle • On average the UK economy grows by around 2.5% a year, this growth rate is enough to double wealth in around 35 years. But the economy does not grow at a steady rate. The chart below shows growth rates over the last 3 years. The figures for 2008-9 are negative. During this period the economy shrunk in size – output fell.

4. The business cycle

5. Boom • The boom period, which can last for 2 or 3 years, benefits most firms and consumers. • Unemployment is low , consumer demand is strong, profits for firms are high and there can be a budget surplus for the government caused by high tax revenues and lower expenditure on Social Security. • But high levels of demand can increase prices, workers often demand higher wages, pushing up firms’ costs.

6. Downturn • Following a boom often comes a downturn – there is less investment by firms—business owners and managers become nervous about the future and start to cut back. • Higher inflation in a boom may have caused the Bank of England to increase interest rates, so people are spending less, unemployment starts to creep up. • The economy may still be growing, but at a much lower rate. In a boom the economy can grow by 4% in a year, in downturn growth will slip to around 1%.

7. Recession • Sometimes a downturn turns into a recession – the economy starts to shrink in size. • If we have a recession we can see rapidly increasing unemployment, fast falling demand from consumers, falling investment by firms and a decline in the levels of inflation and interest rates. • Between 2008 and the middle of 2010 we saw in the UK the longest recession since the Second World War. • Unemployment increased by over 1 million, and many big firms like Borders and Woolworths went bust.

8. Recovery • Hopefully the recession will soon turn into a recovery. • Firms start to see business opportunities, the cost of borrowing can be low, so investment by firms will start to increase. • New jobs are created so unemployment falls and consumers start to spend again. • New firms start up and profits should begin to increase. • Confidence grows, people are now much more willing to spend money on big ticket items like cars. • Firms see their sales rising, so take on new workers. • Growth increases to 2% or more—much higher and we will be back in a boom.