Analyzing the GDP changes over the past 10 years in the United Kingdom

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Table of Contents

Introduction
Brief history of the UK economy
Factors that have led to the GDP changes
Conclusion
Works Cited

Introduction

Over the past century, the human race has dedicated a vast of the available resources to the efforts of self actualization in terms of development either politically, socially, economically or technologically. To provide a means for measuring the progress made, means have been developed through which progress in these sectors can be analyzed and monitored all the while checking on the possible ramifications that can arise from any selected course of action.

This paper shall focus on the economic aspect of development. It shall dwell on the gross domestic product (GDP) as one of the tools used to monitor economy growth in various economies. Much of the discussion shall be directed towards analyzing the GDP of the United Kingdom all the while highlighting some of the factors that have either improved or hindered its economic growth in the past decade.

Brief history of the UK economy

According to Taylor, gross domestic product refers to the monetary value of all goods and services produced by an economy within a specific period of time (483). If the figures are high then it means that the individual productivity levels are high hence a better economic growth rate. The United Kingdom is considered as the fifth largest economy in the world and second in Europe with estimated GDP figures of US$ 2.28 trillion annually.

With this in mind, we would expect the economy to be thriving but this is not the case. Over the decade, the economy has actually been on a down slope due to various economical factors. As per the statistics provided by the office for national statistics, UK’s GDP in percentage in the past decade was highest between the fourth quarter of 2005 and the second quarter of 2006 (above 3%) but has declined ever since to a shocking -6% in 2009.

Factors that have led to the GDP changes

In the late 1990’s, the house prices were relatively low in the UK and many people quickly invested in the real estate market. However, the housing prices due to forces of demand and supply have ever since been on an increase at a very alarming rate. Currently, in most parts of the UK, house prices are about 14 times the average wage of most households. This house crisis has affected the GDP over the years because as houses become more expensive the lesser the investments margins in that particular region.

In addition to this the rates of mortgages was also highest between 2005 and 2007. This means that most of the money earned over this period went into servicing these mortgages instead of investing it into productive ventures which would otherwise improve the GDP. Vandenberg asserts that the construction of social buildings has declined over the past 25 years (258).

In a bid to correct this crisis, the government has put in place a huge budgetary allocation to ensure that more than 20,000 houses are built by the year 2011. If the implementation is successful, it will reduce the house prices by a noticeable margin and consequently expand the disposable incomes of households. This move will therefore improve the saving patterns of the households paving way to more investments potential from the same and finally improve on the GDP figures in the United Kingdom.

The credit crunch has also affected the GDP levels in the United Kingdom. Lending institutions are reluctant to issue loans to individuals and whenever they do, the interest rates and conditions are very strict. The current financial turmoil has greatly affected the financial industry in the UK both in terms of the lenders and the individual households.

A case in point would be the Northern Rock a reputable lender in the UK which had to borrow an emergency loan from the bank of England in order to ensure its survival through these troubled times. With the interest rates as well as bank rates being high, many organizations and households are discouraged to borrow funds and as a result, the investment levels in the UK has been on a downward trend in the past couple of years (Adele 136). The whole situation has seen the GDP levels drop significantly over the past three years.

Inflation and unemployment have also taken a toll in the GDP levels over the years. A particularly significant phenomena is the global recession that occurred between 2008 and 2009 which led to UK having the highest unemployment rates amongst the developed nations.

This was because effective demand was low and the cost of production was increasing due to inflation. As a result to this, many enterprises had to cut down on production which led to many people being laid off and other small to medium sized companies had to close down completely.

In addition to this, the US dollar has been particularly weak in the past five years and it has affected the international trade in terms of imports and exports. UK capitalized mainly on exports such as coffee and other manufactured goods but these products fetched very little due to the recession and inflation rates all around the world.

Taylor proposes that the in any economy, inflation has diverse implications on employment which affects the real GDP and capital accumulation (840). The truth of this statement is currently being experienced in UK where inflation is high, unemployment on the increase and GDP levels on a record low.

Another important factor that has greatly affected the GDP in UK is the fiscal and monetary policies that are in use. The Current prime minister, Mr. Gordon brown had adopted a golden rule which stipulated that the government should only borrow funds for future use and that the current issues would be serviced by the tax revenue collected.

An investment rule was also developed under which the government would have national debts equivalent to 40% of the GDP. However, through the years, the taxes have continually increased and the national debt currently is well above 42% of the GDP and it could increase to 70% by the year 2010. As a result of this, the numbers of potential investors from within and outside UK have reduced.

In addition to this, the levels of production have also gone down over the years not only because of the economic reasons but also due to climatic and political issues which have also affected the GDP levels in UK. Hunt iterates that productivity and trade are the key components behind the success and growth of any economy (8). As such UK has over the decade undermined these two factors and as a result it is suffering for its mistakes in terms of wealth accumulation.

Conclusion

From this paper we have seen the various factors that have affected the economic growth of the United Kingdom. Vivid descriptions and explanations have been provided to further help in understanding why and how UK is at its current position in terms of GDP. However, there are measures that can be taken so as to salvage the whole situation. The government may reduce taxes to encourage investment and also use price legislation to reduce inflation.

This will improve productivity and in the long run, the GDP levels. The banking sector should also find a way to reduce interest rates on loans to encourage borrowing which will also improve the investment portfolio in UK. If the recommendations above are implemented, they will go a long way in assisting UK as a whole in its road to economic recovery.

Works Cited

Adele et al. “Medium-Term Review 2008-2015, No. 11.” ESRI, 2008.

Economy watch. “The Bank of England, UK Monetary and Fiscal Policy.” 2010. Web.

Hunt, B, et al. “U.K. inflation and relative prices over the last decade: how important was globalization? Issues 2007-2208.” International Monetary Fund, 2007.

Office for National Statistics. “ GDP Growth”. 2010. Web.

Taylor, B, J. “Economics.” Cengage Learning, 2006.

Vandenberg, M. “An Inclusive Environment: An A – Z Guide to Legislation, Policies and Products.” Butterworth-Heinemann, 2008.

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