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Requirement
Utilise macroeconomic data to describe the major changes in the UK economy since 1979 and examine the causes, costs, and possible remedies for inflation and unemployment.Your essay will show changes in GDP, inflation, unemployment and Balance of Payments since 1979 in graphs and you will interpret them in writing identifying dates and size of peaks and troughs. The second part of your essay will have 3 distinct elements (causes, costs and remedies) for each of inflation and unemployment.
Solution
Introduction
In 1979, Mrs. Thatcher came to power in the UK and at that time the economy of the UK was facing various structural problems as inflation doubled in figures, there were powerful trade unions that caused inflation in wages and time was also lost due to strikes. Then after the war, the rate of unemployment increased extensively, and the government took a high level of debt that required it to borrow money from the IMF. Since then there have been various changes in the structure of the economy, and it has changed for the better.
It can be seen that from 1979 to 2015, the GDP of the UK has increased too much. In 2014, it was 2988.89 billion US dollars. Till 1980, the GDP has shown a sharp increase, but it declined from 1980-1984. After that, it increased till 1988 and became stagnant with a slight decline and again rose till 1992. For one year it declined i.e. from 1992-1993 then it rose at a stretch till 2000. These fluctuations happened till 2000 only. After that, the GDP continued to rise until 2015. From 2000-2008, the GDP increased continuously but after that; there was a slight decline for one year. From then until 2015, the GDP of the UK increased.
It can be seen that the rate of inflation rose from 1979 and reached very high to more than 8% after the 1990s. it declined sharply from 1992 onwards till 1993 then further the rate of inflation declined to less than 2% in 1994-1995 and remained below 4% till 2009. Then in 2009, it increased to 55 in 2009 and gain declined after that. From 2010 onwards the inflation increased till 2011-2012 and then declined to 2% in 2012-2013. Finally in 2015, the inflation came down to almost 0. It reached maximum in 1991-92, and it has not reached to that level till now.
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Changes in unemployment
The rate of unemployment was very low in 1979, but it rose sharply from 1980 onwards and reached to 12% in 1983. After that, it declined slightly till 1986 and remained stagnant but declined sharply after that till 1990. Then it again rose to 11% in 1994. After 1994, the rate of unemployment declined sharply till 2001 and did not increase much until 2008-09. In 2010, it again rose to 8% and in 2011-12, it reached more than 8%. After that, till 2016. It has been declining.
Changes in Balance of Payments
There have been a lot of fluctuations in the BOP for the UK. Broadly, it was highest in 1981 and reached lowest in 1989. It reached positive from 1995-1997 but after that, it has remained negative.
Causes costs and remedies for inflation in the UK
The inflation in the UK is caused due to rising rate of wages as when the people have more disposable income; they spend more and money supply rises. The UK imports one-third of the goods, and when the currency devaluates, the prices of imports increase and they become more that again increase the prices. The firms push the prices up to earn higher profits. This again leads to the higher inflation rate. The prices of houses keep on increasing in the UK and cause a positive wealth effect; the consumers buy more and money supply rises(Lewis, 1970).
The costs related to inflation are: the value of money and assets of a country gets eroded. The income between the groups gets redistributed. The balance of payments gets worsened when the rate of inflation rises. The investment becomes uncertain and starts to fall. The price mechanism of the country also gets distorted(Mitchell, 2000). When average prices increase, the price mechanism cannot effectively fulfill its role as a mechanism for resource allocation. Markets work best when prices rise and fall, providing information about relative values, but if average prices rise continuously, with increases outweighing decreases, resource allocation is distorted(Schaufeli, 1988).
To control inflation, the contractionary monetary and fiscal policy is used. The central bank increases the repo rate, CRR, and SLR so that less money gets pumped into the economy. Under the fiscal policy, the government increases the rate of taxes and reduces its spending. All these measures decreasethe floating money in the economy of the country and hence inflation reduces over time.
Causes costs and remedies for unemployment
Unemployment is caused when the people takes a lot of time to move between jobs. Until this time, they remain unemployed. When people take the time to learn the new skills, then they remain unemployed and increase the unemployment rate of the economy. When new technology comes up, the companies downsize their staff, and people lose their jobs. Some jobs are seasonalwhen the cycle gets completed; the people lose their jobs and remain unemployed (Mitchell, 2000).
The costs of unemployment are: the growth of output stagnates and declines eventually that has an impact on the economic growth of the country. People’s skills don't get enhanced for a long time. The development of the country freezes.
To reduce the rate of unemployment, the occupational immobility should be reduced. The aggregate demand should be boosted. The benefits schemes for the people who are unemployment can be introduced. Government subsidies for firms that take on the unemployed – for example, as part of the UK Youth Contract, payments of up to £2,275 are available to employers who take on young people (aged 18-24) who have been claiming JSA for more than six months (Schaufeli, 1988). Lower taxes on businesses that employ more workers might be effective, for example, cuts in employer national insurance contributions for young, low-paid workers (Lewis, 1970).
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Viner, J. and Keynes, J.M., 1936.Mr. Keynes on the causes of unemployment.
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Schaufeli, W.B., 1988. Perceiving the causes of unemployment: An evaluation of the Causal Dimensions Scale in a real-life situation. Journal of Personality and Social Psychology, 54(2), p.347.
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Mitchell, W.F., 2000. The causes of unemployment. The Price of Prosperity: The Economic and Social Costs of Unemployment, UNSW Press, Sydney, pp.49-87.
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Lewis, W.A., 1970. Summary: The causes of unemployment in Less Developed Countries and some research topics. Int'l Lab. Rev., 101, p.547.
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Podsakoff, P.M., MacKenzie, S.B., Lee, J.Y. and Podsakoff, N.P., 2003. Common method biases in behavioral research: a critical review of the literature and recommended remedies. Journal of applied psychology, 88(5), p.879.
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Hart, A.B., 1931, August. Remedies for Unemployment.In Current History and Forum (Vol. 34, No. 5, p. 737). CH publishing corporation, etc..
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Tobin, J., 1995. Inflation and unemployment.In Essential Readings in Economics (pp. 232-254).Macmillan Education UK.
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Di Tella, R., MacCulloch, R.J. and Oswald, A.J., 2001. Preferences over inflation and unemployment: Evidence from surveys of happiness. The American economic review, 91(1), pp.335-341.
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