UK Economy Analysis and Monetary Policy

This assignment analyzes the health of the UK economy, focusing on key indicators like inflation (currently above the 2% target), unemployment rate, and GDP growth. The analysis also explores the UK government's monetary policies aimed at achieving full employment and price level stability. Several measures implemented by the government to address the recession's impact are discussed.

Running head: PERFORMANCE OF UK ECONOMY
PERFORMANCE OF UK ECONOMY
Name of the Student
Name of the University
Author’s Note

1PERFORMANCE OF UK ECONOMY
Table of Contents
Introduction......................................................................................................................................2
Discussion........................................................................................................................................2
Analyzing growth rate in UK economy.......................................................................................2
Macroeconomic indicator determining UK’s economic performance........................................3
UK economy’s performance trends.............................................................................................3
Measures adopted by UK government for achieving production output performance...............5
Unemployment trends based on Unemployment rate..................................................................6
Types of Unemployment in UK economy...................................................................................7
Measures taken by the UK government for achieving full employment.....................................8
Trends of Inflation based on Inflation rate..................................................................................9
Explaining types and cause of inflation.......................................................................................9
Cause of inflation in UK economy............................................................................................10
Government measure for achieving stable price.......................................................................10
Conclusion.....................................................................................................................................10
References......................................................................................................................................12

2PERFORMANCE OF UK ECONOMY
Introduction
The United Kingdom (UK) economy ranks fifth as appraised by nominal GDP and ninth
as accounted by GDP per capita in the globe. UK’s service sector contributes to around 80% of
total GDP in the economy. In addition, the aerospace, pharmaceutical and financial services
industry plays a crucial function in contributing growth of this nation. The UK’s GDP increased
at lower rate by around 0.2% between 2016 and the first quarter of 2017. The growth of UK’s
GDP slowed down due to fall in retail and manufacturing industries, but the manufacturing and
finance industries continues to grow at a higher rate. Another indicator that slowed this
economy’s growth is inflation rate that rose by around 2.6% in 2017. Besides, the rate of
unemployment in UK falls to 4.5% in 2017 from the previous year, which was 4.9%. This report
reflects on how the macroeconomic indicators including GDP growth, rate of unemployment and
inflation impacts on the country’s economic performance (Antal and Van den Bergh, 2013).
Furthermore, UK’s economic performance trend over the years has been discussed in this report.
In addition, measures adopted by the UK government for achieving production output, full
employment and stable price are also highlighted in this report.
Discussion
Analyzing growth rate in UK economy
GDP is termed as the total value of products produced within the geographical border
over a certain period. Real GDP is one of the macroeconomic indicators that measure the
economic output value with respect to its change in price (Argy, 2013). GDP per capita measures
the economic output of nation that deems on respective countries GDP with respect to its entire
population. However, rise in per capita GDP signals improvement in living standards and

3PERFORMANCE OF UK ECONOMY
productivity. Respective nation’s government uses this indicator for analyzing the purchasing
power and growth of the economy. Growth rate in real GDP determines the change in economy’s
GDP in terms of percentage over the years.
Macroeconomic indicator determining UK’s economic performance
The countries consider real GDP as a good index in determining its performance as it
involves the fluctuating product value expressed in terms of money (Chaiechi, 2012). However,
it gives an idea about the total output of the nation with decrease in distortion because of certain
factors including inflation and fluctuations in currency rate. Real GDP per capita is mainly
adjusted for rate of inflation for determining the workforce productivity of the nation (Nalewaik,
2012). On the contrary, this indicator does not consider technology influence over the production
output. Hence, these indicators help in comparing the countries production output and
forecasting recession in an accurate manner.
UK economy’s performance trends
Recent data reflects that per capita GDP in UK in the year 2016 was 40,096 and 37,813
in the first quarter of 2017. This highlights on the fact that the GDP of this economy declines by
5.69% in the present year. The UK’s real GDP growth rate averaged to 0.61% over the years.
The service and retail sectors of UK contributed mainly to this slow GDP growth of UK (Denis
and Kannan, 2013). This sector increased by 0.8% in 2016 but in the first quarter of 2017 the
growth slowed down to 0.3%. In addition, UK’s production sector has reduced to 0.4% in quarter
2 of 2017 from the previous year. Moreover, the deceleration in the above sectors occurred due
to increase in prices. After Brexit, the currency value of UK decreased by nearly 15% to 20%.
However, the GDP in UK showed a reduction of 0.7% from 2016 to 2017 and this reflects a
downward trend of the nation’s current performance. The statistic reflects that real GDP growth

4PERFORMANCE OF UK ECONOMY
rate increased every year except during recession phase. Thus, during this period the UK’s GDP
decreased by 4.3%, although in the year 2014 the GDP growth rate peaked to 3.1%.
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
0
10000
20000
30000
40000
50000
60000
UK REAL GDP PER CAPITA
UK REAL PER CAPITA GDP
YEAR
Figure 1: GDP PER CAPITA TREND IN UK FROM 2007-2017
Source: (Author’s creation)
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
-5.00%
-4.00%
-3.00%
-2.00%
-1.00%
0.00%
1.00%
2.00%
3.00%
4.00% UK REAL GDP GROWTH RATE IN %
UK REAL GDP GROWTH
RATE IN %
YEAR

5PERFORMANCE OF UK ECONOMY
Figure 2: GROWTH RATE OF REAL GDP IN UK FROM 2007-2017
Source: (As created by author)
Measures adopted by UK government for achieving production output performance
Productivity is a vital determinant of long- term nation’s growth rate. Productivity has a
direct connection with the country’s living standards. However, increase in growth of
productivity improves the nation’s living standards. This leads to the stronger growth of
country’s GDP, which in turn decreases the budget deficit of the government and raises the tax
revenues. UK’ s production output has stagnated since recession (Martin and Milas, 2013). In
2017, the production output level has been recorded to around 0.4% low, as it was earlier in
2007. The annual productivity growth rate of this economy in 2017 estimated to around 0.3%.
Due to this low productivity level, the UK’s government adopted certain measures in order to
improve production output performance.
The government of UK has designed 15-point plan of productivity for boosting nation’s
productivity in future. They also proclaimed four-year commitment with the NPIF( National
Productivity Investment Fund). Moreover, UK‘s government has implemented new industrial
policies that includes that the market cannot fully dictate economy’s industrial structure (Rots
and Maduko, 2014). The 15 measures that UK’s government has adopted for designing the
productivity plan are:
 The UK government has reduced corporation tax and income tax for incentivizing
investment.
 They have improvised digital infrastructure in the firms that includes broadband speed
and introduction of 4G.

6PERFORMANCE OF UK ECONOMY
 They strategized to invest more in energy sector in order to increase competition among
the firms.
 The government of this nation also encouraged the firms in implementing advanced
technology and recruiting skilled workforce.
 They also encourage the people to save more and invest in long term in order to raise the
allowance of annual investment.
Unemployment trends based on Unemployment rate
Rate of unemployment refers to the jobless workforce percentage divided by total people
in the workforce. Unemployment rate is considered as the lagging indicator and increase or
decreases according to the economic conditions. Rate of unemployment and GDP growth of an
economy is inversely related to each other. This means that increase in unemployment rate leads
to fall in country’s GDP growth rate, which is stated by Okun’s law (Levine, 2012). In addition,
unemployment trends also depend on the economy’s rate of inflation. Therefore, Phillips’s curve
states that unemployment rate and inflation are inversely correlated.
The UK’s unemployment rate in 2017 fell to 4.5% from the previous year that accounted
to 4.9%. Previous record reflects that UK’s unemployment rate remained stable over the 10
years. UK’s unemployment rate averaged to 7.10% over the years and this affected the GDP
growth of the economy. Moreover, the decline in rate of unemployment resulted to increase in
employment rate in the country. Therefore, decrease in unemployment rate enhances the UK real
GDP growth rate.

7PERFORMANCE OF UK ECONOMY
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
9.00%
UK's RATE OF UNEMPLOYMENT
UK UNEMPLOYMENT RATE
YEAR
Figure 3: UK UNEMPLOYMENT RATE TREND FROM 2007-2017
Source: (As created by author)
Types of Unemployment in UK economy
Unemployment is basically divided into three parts namely structural, cyclical and
frictional unemployment.
Cyclical unemployment- It occurs when the goods overall demand in the country cannot bear
full employment (Weale, 2015). The laborers become jobless due to depression in business
cycle. However, as the output of the economy decreases, the business cycle declines and hence
cyclical unemployment increases.
Frictional unemployment- This situation results from turnovers in the labor market. It mainly
occurs during the period when the employers are in search for jobs or transit in another job.
Moreover, if the economy penetrates into phase of recession, frictional unemployment tends to
reduce. It mainly exists in the country as disparity occurs between laborers and job.

8PERFORMANCE OF UK ECONOMY
Structural unemployment- In this case, the rate remains high even after the recession period.
Structural unemployment takes place due to advancement of technology and unskilled workforce
in the industry (Mankiw, 2014). As the unskilled workers are unable to adopt the new
technology, retrenchment takes place in the firms.
Cyclical unemployment occurred in UK during the recession period. During this phase, the
countries real GDP fell and production output of the firms also lowered. As a result, there occurs
a decline in demand for laborers. Frictional unemployment always exists in UK as the
individual’s takes time in finding jobs. In addition, youth unemployment also exists in UK
because of lack of skilled workers.
Measures taken by the UK government for achieving full employment
UK government have introduced Work program for replacing the schemes and projects of
employment. It helps in providing personalized support to the applicant who in search for job.
The government of UK also implemented Help to Work for those individuals who have done
the work program and are still searching for job (Mishkin, 2012). The work coaches aid the
individuals in knowing their needs and helping them to find the job and design their work plan.
UK’s government facilitates Youth in finding jobs through the introduction of Youth contract.
This contract gives opportunities to the young people that include apprenticeships. They have
also introduced ‘Work Choice’ program for assisting the disabled people finding their jobs. The
government adopted new policies for the older individuals who like to continue with the job even
after retirement.

9PERFORMANCE OF UK ECONOMY
Trends of Inflation based on Inflation rate
Inflation occurs in an economy when the product price level rises and accordingly the
currencies purchasing power falls. The Central Bank of every nation tries to bound inflation rate
and evades deflation for keeping the economy running in a smooth way. The inflation rate of the
nation is basically determined by consumer price index (CPI) that helps in tracking products
prices over a particular period (Bils et al., 2012). The inflation trend in UK remained at steady
level over the last ten years except in the year 2008 and 2011. The present inflation rate of UK
accounts to 2.7%, which is quite high as compared to 2016 that recorded to1.6percentage.
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
4.00%
4.50%
5.00%
UK INFLATION RATE
UK INFLATION RATE
YEAR
Figure 4: UK INFLATION RATE TREND FROM 2007-2017
Source: (As created by author)
Explaining types and cause of inflation
Inflation in economy is mainly classified into two parts namely demand-pull and cost-
push inflation. Demand –pull inflation arises when nation becomes nearer to full employment.
Therefore, rise in economies aggregate demand leads to rise in product price level. However, it

10PERFORMANCE OF UK ECONOMY
occurs due to trend in long run growth rate in the economy (Davig and Doh, 2014). Cost-push
inflation occurs due to various factors that includes- increase in wages, prices of imports and raw
material, low productivity and rise in taxes. In 2012, this economy has experienced increase in
cost-push inflation because of currency depreciation against Euro.
Cause of inflation in UK economy
In this year, this nation has experienced rise in force of cost-push inflation. Despite low
growth of the economy, this occurred due to rise in inflation rate (Galí, 2015). In addition, the
factors that affected cost-push inflation are Sterling devaluation and increase in petrol prices. In
2017, the CPI level in UK recorded above the target level of 2% inflation rate.
Government measure for achieving stable price
Price stability is considered as the macroeconomic goal in stimulating the development of
the economy. The monetary policy facilitates in keeping the price level stable (Mahadeva and
Sterne, 2012). The central government of UK adopted certain macroeconomic policies for
reaching the monetary equilibrium. The UK’s government tries to keep the inflation rate below
the target level that is 2% as it impacts on the performance of the economy. Moreover, the
government tries to keep the interest rate high because this reduces the consumers saving. As a
result, this pushes the products price level down and regulates the rate of inflation in the country.
Conclusion
It can be concluded from the above study that the health of every nation mainly depends
on the macroeconomic indicators discussed in the above report. The present state of the UK
nation highlights that growth rate of both real GDP and per capita GDP decreased from the last
year. In 2017, the rate of inflation in UK increased from the preceding year and is above the

11PERFORMANCE OF UK ECONOMY
target level, which is 2%. Although this nation’s unemployment rate in 2017 declined from the
last year, the GDP growth rate increased by small rate. However, the UK government
implements certain monetary policies to achieve full employment and stability in price level of
the country. Thus, the government of this economy has adopted few measures for improving the
health of the economy that was affected during the recession period.

12PERFORMANCE OF UK ECONOMY
References
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Davig, T., & Doh, T. (2014). Monetary policy regime shifts and inflation persistence. Review of
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Levine, L. (2012). Economic growth and the unemployment rate.
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13PERFORMANCE OF UK ECONOMY
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