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Article 1 - UK GDP, Business Cycle & Unemployment

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Article 1 - UK GDP, Business Cycle & Unemployment

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For British workers, the lowest jobless rate in more than four decades isn't enough to maintain their standard of living.

Basic wages rose an annual 2.1 percent in the three months through July, unchanged from the second quarter and below market forecasts, figures on Wednesday showed. Pay fell 0.4 percent when adjusted for inflation, which is now running just shy of 3 percent.

The pound weakened against the dollar after the report, and slid for the first time in four days versus the euro.

The squeeze has taken a toll on consumer spending, creating a drag on the economy. Bank of England Governor Mark Carney has said that an "element of Brexit uncertainty" is preventing firms from awarding bigger wage increases, while other explanations include poor productivity and companies clamping down on pay to offset rising import costs, another Brexit fallout.

Pressure on real incomes is particularly hitting public-sector workers, who have had pay increases capped at 1 percent since 2013. That followed a two-year freeze as the government sought to bring down the budget deficit.

Prime Minister Theresa May said this week that the government will relax the cap for police and prison officers but Trades Union Congress General Secretary Frances O'Grady responded by demanding "a pay rise across the board" for Britain's 5 million public-sector workers.

Her argument was bolstered by inflation data Tuesday showing price growth is accelerating again. It was at 2.9 percent in August, near its highest in five years.

The labor-market figures from the Office for National Statistics are proving a puzzle, as they come against a backdrop of record employment and growing skills shortages. The ONS data showed jobless rate fell to 4.3 percent in the latest three months, the lowest since 1975 and below the BOE's equilibrium rate.

They're also posing a dilemma facing BOE policy makers over when to raise interest rates. While a minority want to hike now, those arguing to keep the benchmark at a record low point to the growing strain on consumers from the sterling-driven surge in prices.

At Bloomberg Intelligence, Dan Hanson and Jamie Murray expect Brexit uncertainty to increasingly weigh on growth and the labor market, leading the BOE to keep rates on hold until 2019.

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U.K. Unemployment at 42-Year Low Fails to Spur Wage Pickup

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For British workers, the lowest jobless rate in more than four decades isn't enough to maintain their standard of living. Basic wages rose an annual 2.1 percent in the three months through July, unchanged from the second quarter and below market forecasts, figures on Wednesday showed.

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From the article - "Basic wages rose an annual 2.1 percent in the three months through July, unchanged from the second quarter and below market forecasts, figures on Wednesday showed. Pay fell 0.4 percent when adjusted for inflation, which is now running just shy of 3 percent."

According to the income approach, GDP = Compensation of employees + Rents + Profits + Net interest + Indirect business profits + Depreciation. On the other hand, the expenditure approach states GDP = C + I + G + (X - M). (words in bold are the subjects of focus)

Ceteris paribus, owing to inflation nearing 3%, real GDP is understated, which implies that price level goes up. As a result, C (consumer spending) decreases as household income, consisting of salary (Compensation of employees) is lower than inflation by 0.4%, meaning that consumers have lesser real income to purchase consumer goods.

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The unemployment rate of United Kingdom shows us the proportion of the Labour force who have not yet found jobs, even though they are able and willing to work, and are actively seeking jobs. It is the scarcity and non-availability of jobs for people who are able and willing to work at the prevailing wage rate.

High employment rates are costly, not only to the individuals and families directly affected, but also to the economy as a whole. Some examples include personal cost, social cost and other costs to the economy. For personal costs, there will be the loss of stable income and loss of self esteem. These would most likely lead to high levels of anxiety and depression. For social cost, there will be an increase in crime rates, increased divorce rates and even possibly political unrest. Other costs to the economy, on the other hand, are factors such as loss of output, loss of labour resources or a decline in consumption, investments and consumer confidence.

The employment rate could be understated (lower than what it really is) due to reasons such as discouraged workers, part-time employment or simply underemployment. It can also be overstated (higher than it really is) due to workers engaged in illegal work or workers who could work but choose not to in order to qualify for unemployment benefits.

There are four types of unemployment. These types of unemployment can affect any economy. They are cyclical, structural, frictional and seasonal unemployment.

Cyclical unemployment is caused by the lack of jobs during an economic recession. When real GDP falls, some companies cut their losses and close down. Hence, many jobs disappear and the unemployed then scramble to find the decreasingly available number of jobs. This level of unemployment in the economy fluctuates according to the business cycle.

Structural unemployment is caused by a mismatch of the skills of workers that are out of work and the skills that are required for the current and existing open job opportunities. This form of unemployment can be more problematic and long lasting. Also, providing additional education and retraining the unemployed is required to keep them updated on the latest skills and thus allow them to be re-employed.

There are many causes of Structural Unemployment. They are :

1.      New Products

2.      New Technology

3.      Relocation of Business Operations

4.      Change in Taste and Preferences

5.      Change in Government Policies

Frictional unemployment, on the other hand, is caused by the normal search and down time required by workers with marketable skills who are changing jobs, initially entering the labor force or re-entering the labor force.

Seasonal unemployment is a type of working arrangement in which a person is employed routinely for part of the year, but spends the remaining months or weeks without a job and is hunting for an alternative job.

From the article - "The labor-market figures from the Office for National Statistics are proving a puzzle, as they come against a backdrop of record employment and growing skills shortages."

According to the 4 causes of unemployment mentioned above, Britain’s unemployment rate is caused by Structutal unemployment. This is because of the relocation of business operations due to the Brexit’s occurrence. Firms have relocated their manufacturing operations to low-cost countries such as China, India and Vietnam; transferring many blue collar jobs away. Existing jobs are then lost through the oursourcing of some jobs to low-cost countries

Governments can help mitigate their unemployment situation through the following:

-        Give unemployment benefits that involve providing those unemployed with some assistance while they are in transit to another job. However, if this benefit is misused, it may actually cause the unemployment situation to worsen or even worse, become permanent.

-        Give incentives to employers and employees, so individuals are encouraged to work, and firms are encouraged to hire more workers.

-        Creating more jobs may involve the government hiring more workers directly by approving an increase in budget targeted towards more government spending or through the use of incentives such as tax exemptions to get firms to hire more workers.

Improving employability usually involves getting workers to upgrade their skillset in a bid to remain employable which preempts structural unemployment

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Business Cycle
These occurrences happen due to the business cycle.  What is the business cycle? The business cycle refers to alternating periods of economic growth and economic decline, which can be measured by changes in Real GDP.

There are four phases in a business cycle. The peak, recession, trough and recovery.

The peak occurs when the Real GDP reaches its highest level relative to recent years after rising during a recovery and the economy is closer to full employment. Business profits and utilized production capacity are at their highest levels relative to recent years.

The trough is the Real GDP that reaches its minimum after falling during a recession and the unemployment rate is at its highest relative to recent years. Business losses and idle productive capacity are at their highest levels relative to recent years.

The contraction or recession occurs when Real GDP declines and the unemployment rate rises. Business profits fall and production capacity is underutilized. There will be deflationary pressure as price level decreases.

Expansion or recovery on the other hand occurs when Real GDP increases and the unemployment rate falls. Business profits improve and production capacity is more utilized. There will be inflationary pressure as the price level increases.

From the article - " Jobless rate declines to 4.3%; wage growth stays at 2.1%" & "Pay fell 0.4 percent when adjusted for inflation, which is now running just shy of 3 percent."

According to the four phases introduced in the beginning. It can be assumed that Britain is having a recovery instead of a recession.

From the article - "Bank of England Governor Mark Carney has said that an “element of Brexit uncertainty” is preventing firms from awarding bigger wage increases" shows that people are in uncertainty after Brexit and expect Britain to be in recession. However their pound sterling is on the road to recovery as their Real GDP increases, unemployment rate fall and they face inflationary pressure.

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What is Inflation?
Inflation is defined as the sustained and continuous increase in the average level of prices of goods& services in the economy

UK Inflation Rate

"Inflation rate of UK at August 2017 is high at 2.9% against the 2.2 OECD average."
(Above average)

What does this mean& what are the possible repercussions?
High inflation rates may lead to
1. Decrease in consumerism, leading to decrease in production, which usually leads to disinflation. This fluctuation regulates the economy.
2. Nominal income by UK citizens decreases due to the decrease in their dollar voting power
Will inflation correct itself

Cause of inflation

"The increased cost of importing food and fuel is pushing prices to rise at a faster rate than anywhere in the G7 group of leading global economies".

This is an increase in cost of factors of production and is categorized as cost-push inflation

Leaving inflation unchecked
Consistently high inflation rates could be detrimental for a nation's progress as it erodes the purchasing power of the money.

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Article 2 UK - INFLATION, GDP & Keynesian Model

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Article 2 UK - INFLATION, GDP & Keynesian Model

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The UK has the highest inflation rate among the world's top economies, in the latest sign the Brexit vote is contributing to a squeeze on living standards.

The increased cost of importing food and fuel is pushing prices to rise at a faster rate than anywhere in the G7 group of leading global economies, according to the Organisation for Economic Co-operation and Development. The UK is only behind Turkey, Mexico and the eastern European states of Latvia and Estonia in the club of 35 developed nations.

The annual growth in prices in the UK jumped to 2.9% in August from 2.6% in July, equalling a four-year high in the consumer price index (CPI) reached in May earlier this year. That outstrips the average 2.2% growth in prices across the OECD for the same month.

The UK ranked top for inflation among the G7, whose other members are the US, Canada, France, Germany, Italy and Japan. The rise in prices was also above the averages for the euro area, the wider European Union and the G20 nations.

Turkey had the highest inflation rate at 10.7%, followed by Mexico at 6.7%. Israel was the only country to record falling prices, at -0.1%. Major central banks around the world target an inflation rate of 2% to encourage their economies to expand at a sustainable pace.

The Paris-based organisation found energy price inflation accelerated to 5.9% in the year to August, compared with 3.7% in July. Food price inflation also rose, albeit at a slower pace, to 1.8% in August, compared with 1.7% in July.

Inflation rates among OECD nations

Excluding food and energy, inflation was stable across the OECD nations at 1.8% for the fourth consecutive month.

The figures illustrate the UK's reliance on imports, which have become costlier since the Brexit vote sparked sterling's devaluation. The pound remains about 10% below its level immediately before the referendum.

Prices in non-food stores and online rose at the strongest annual growth rate since 1992 in August, although shoppers continued to spend against the forecasts of City economists. The Bank of England's monetary policy committee estimates CPI will peak above 3% this month, before falling over the coming months.

Threadneedle Street is considering whether to raise interest rates for the first time in a decade from as early as next month. Raising the cost of borrowing may help to cut the rate of growth in prices, as it should curb the amount of money available in the economy to buy goods.

However, a rate rise also risks undermining economic growth by removing cheap money available to consumers and businesses. The Bank has been warned against raising interest rates amid weak signals for economic growth.

The OECD estimates France, Italy and Germany will grow faster than the UK amid uncertainty from Brexit, which is hitting consumer confidence and sapping business investment. The group of wealthy nations forecasts the UK's GDP growth will drop from 1.6% this year to 1% next year.

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UK has highest inflation rate among world's top economies, says OECD

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The UK has the highest inflation rate among the world's top economies, in the latest sign the Brexit vote is contributing to a squeeze on living standards. The increased cost of importing food and fuel is pushing prices to rise at a faster rate than anywhere in the G7 group of leading global economies, according to the Organisation for Economic Co-operation and Development.

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What is GDP?
The Gross Domestic Product (GDP) of a nation measures the total value of all goods and services produced within a specific time frame.

UK GDP

"The OECD estimates France, Italy and Germany will grow faster than the UK amid uncertainty from Brexit, which is hitting consumer confidence and sapping business investment. The group of wealthy nations forecasts the UK’s GDP growth will drop from 1.6% this year to 1% next year."

What are the possible repercussions?
Decrease in business investment consumer confidence and economic growth which may lead to  recession.
1. Recessions often cause retrenchment, which lower the average disposable income. This leads to a decrease in aggregate demand.
2. This leads to a decrease in supply, this may lead to a shortage of necessary and luxury goods which, paired with an increase in demand for inferior goods due to lesser spending power, leads to an increase in price of necessities.

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Analysing UK Government's actions on Inflation using the Keynesian Model

Combating inflation

The Keynesian Model states:
1. The key determinant of economic activity (output) is aggregate expenditure
2. Government intervention is necessary in managing the economy

"Prices in non-food stores and online rose at the strongest annual growth rate since 1992 in August, although shoppers continued to spend against the forecasts of City economists".

This observation is in alignment with the Keynesian Model as it shows that consumers do not regulate spending on their own, as suggested by the Classical Theory of Economics.

Effecting change using the Keynesian Model

Decreasing Inflation:
Increasing interest rates

"Major central banks around the world target an inflation rate of 2% to encourage their economies to expand at a sustainable pace."

While the target rate of inflation is 2% and the UK is experiencing an inflation rate of 2.9%, it is only a slightly higher than desirable level of inflation and is not considered hyperinflation.
UK has the confidence to mend this inflation rate problem by increasing interest rate to increase cost of borrowing, which curbs consumer expenditure.

Increasing GDP:
Increasing
government expenditure
While increasing government expenditure increases GDP, it also increases inflation, which is contrary to the goal of UK.
However, to effect a big increase in GDP, there only needs to be a small increase in government expenditure.

This is a theory known as the "Spending Multiplier Effect"
An initial change in spending by government, households, firms, or foreign countries creates a chain reaction of further spending which causes a greater cumulative change in real GDP.

In essence, a small increase in government expenditure that would not trigger a spike in inflation, could cause a large increase in GDP.

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Hello Team,
Some form of prelim analysis noted but with room to expand. If you would like, there's a few suggestions below to explore. These are meant for both padlet and or report.

Once you are happy with the updated padlet, proceed to print out a hard copy and drop it into my pigeon hole at BA office level 9. Remember to kickstart your report writing. :)

Specific comments by article:
Article 2 chosen can also be used to explain GDP (using the Keynesian Model) in addition to inflation.

Wow team is so updated, attempting keynesian model when it was just taught. Good! I do see some form of prelim analysis here. I would encourage you to include a bit more points if you would like, before moving on to prepare your report.

Some questions for thought (for padlet and/or report):
1. Point about erode purchasing power. This is true but article stated otherwise so do find out more about spending by households.
2. Yes, to the point about increasing interest rates and its impact on GDP, through the multiplier effect (Keynesian model). Do note that we are talking about Aggregate Expenditure instead of Aggregate Demand under the Keynesian model. Consumer and business confidence were also mentioned in the article. How will they impact spending?
3. In terms of inflation, I would think there's more you could infer from the article. For instance, the cause of inflation was mentioned. Is this demand pull or cost push inflation?
4. What is UK's targeted inflation rate? Is the current rate worrying?

Article 1 can be used more for unemployment situation in UK.
Some questions:
1. Article mentioned two reasons causing the fall in real wage. Try to identify them and also the type of unemployment that is associated to it.
2. Research further to find out about the measures that the government is taking to help this situation.