In this essay I will look at how the UK administration manage the overall economy and what they use to manage it. I am going to explain the government's monetary objectives and insurance policies and exactly how these policies result business organisations. I am going to briefly explain the several types of unemployment and make clear the consequences of unemployment on businesses. I am going to also explain the different causes of inflation and its own influence on business organisations and the overall economy also to conclude I'll explain the effects of international trade on business organisations.
Managing the market competently is important to the government because if it's done correctly they will stay in electric power. To stay in power a politics party (Labour Party, Conservative Get together and Liberal Democrats etc) must succeed an over-all election. Because of this to happen, people must vote for them. People vote for a party they want to succeed because they imagine once in electric power they'll govern a steady economy. People paying tax contributes to a reliable economy and the federal government use that money to pay for open public services such as NHS, transportation, education, benefits for parents, impaired people and the unemployed.
All governments have common economical objectives, attaining these aims will attain one definitive goal, maintain a steady economy. To do this unemployment must be low. High unemployment has costs which impact the economy. When there is high unemployment more people will be on benefits. This implies fewer people are paying taxes and not all the money has been put into open public services. Having steady prices also plays a part in a stable current economic climate. If prices are constantly growing businesses have to accommodate for these changes. This will likely eventually lead for some of their employees being made redundant or dismissed. Then that leads to more unemployment and fewer people paying taxes. That's the reason the government try to keep inflation only possible.
To understand how money flows within an economy we must look at a theory called circular flow which was first explained by a British isles economist that also explained that high unemployment is one cause to the unstable current economic climate. His name is John Maynard Keynes. Keynes was created in Cambridge, Great britain on the 5 June 1883. Keynes composed a book that was printed in 1936 called "The General Theory of Work, Interest & Money. In this book it explains a theory he formed in the 1930's describing how money moves from private sector businesses (e. g. Tesco, HSBC, and HMV etc) to homeowners. This theory is well known today as the Circular Flow. Circular Flow is when businesses use people to manufacture or sell something or service. Businesses then supply their employees' with salary. This creates demand for the merchandise or service for sale by the business enterprise. Then the employees choose the goods and services from the business enterprise thus developing a Circular Movement of Income. If this process is constantly on the go round it'll cause the overall economy to grow.
But this circulation can have a poor effect. The flow concentrates on the confidence of people and if they believe that a period of hardship is coming they will retain some cash to complete that point. This decreases the demand for something or service. Once this happens people will not buy the maximum amount of products or services, bringing down businesses income. Businesses then start cutting costs to save some cash to complete their time of hardship, this negative result is named a recession.
Although demand is wonderful for businesses, too much demand will cause prices to rise. This rise is called inflation. Inflation occurs when demand for something or service is high and businesses increase their prices to make more earnings. Inflation also offers effects on businesses, one of the results are employee's demand higher salary. Employee's demand higher income when the business is making profit and decide to put up their prices to make more earnings. Another impact inflation has on businesses is less customers will spend their money purchasing goods and services because businesses put their prices up to make more earnings and customers decide not to shop there ever again because the price is too high and maybe they'll be able to obtain it cheaper in other places.
To control inflation the federal government use leakages to use money away from folks who are spending their money on products and services. A leakage is money no more recycled from businesses to homeowners in the circular movement (money that leaks from the economy). You will discover four main leakages from a household expenditure; they are really tax payments, cost savings, rates of interest and imports. Duty payments are money being paid to the government through income (tax), VAT (value added tax) and duty on petrol and smokes. The government could use tax payments to control inflation by increasing tax, which will reduce demand because people will not have the maximum amount of money to spend. This can make businesses lower their prices. But duty payers do nothing like tax, therefore the government increase tax people won't vote for that politics party to stay in power. Cost savings is not handled by the government but it is still classified as a leakage. Personal savings is the fact part of money which in not spent buying goods or services. If people are not spending their income, that money escapes the circular flow and it is not used again by businesses. Interest levels will be the price a person borrowing money has to pay back on top of what she or he lent (e. g. mortgage loans, credit cards and loans). Interest rates are normally expressed as a percentage rate. The Bank of England chooses what that ratio is. They use interest levels to control inflation by increasing it, for example if a person acquired a 250, 000 home loan with an intention rate of 5% they might have to pay back 12, 500 on top of 250, 000. But if the Bank of Britain increases the interest rate to 6%, that person would have to repay 15, 000 rather than 12, 500. That isn't only a 1% increase for that person but also for everyone who may have a mortgage in the UK. Imports are a leakage and Peter Maunder talks about why it is just a leakage in Economics Explained (Collins Educational, 2000). He says
"Imports constitute as a leakage from our economy because in effect homeowners are spending their money overseas"
He is revealing to us that people are spending money abroad instead of in this country. They can be injecting money into other economies thus the amount of money put in is not being reused in our current economic climate. If people spend more money in foreign countries businesses in this country won't sell all the products and services. This will lead to businesses in this country minimizing their prices and making their employees redundant or dismissing them. Should this happen demand will reduce because less people are earning money. Therefore if more imports are performed inflation will decrease and could even cause unemployment.
There are four types of unemployment, frictional, cyclical, seasonal and structural. Frictional unemployment is when people are transitioning from one job to another and are unemployed while looking for another job. Cyclical unemployment is whenever there are changes in the business conditions (i. e. recessions and depressions) and employee's need to be dismissed to support the business. Seasonal unemployment is when people are only employed for a specific season then they dismissed. This happens mainly in resorts because people are just needed through the warmer times. Alain Anderton explains what structural unemployment is Economics Second Model (Causeway Press Ltd, 1995). He says
"Structurally unemployed persons are usually those who just can't find any job they can do"
He is sharing with us that structural unemployment is when people cannot find employment because they cannot find employment which requires their particular group of skills. For instance labour saving machines are doing a few of the processing in factories, so people aren't had a need to do some of the work. Some of these people do not know how to do anything else so their packages of skills are no longer needed. Unemployment is induced by having less demand throughout the market; consequently companies are not making enough money to pay their entire workforce because not enough people are buying their products. If unemployment is high businesses will be influenced because insufficient people will be purchasing their products or services and will cause the business enterprise to dismiss more employees or closedown.
The federal government can control unemployment by using shots. They use these when there isn't enough demand and need to stimulate the economy to set-up demand. What President Roosevelt did through the Great Depressive disorder is a perfect exemplory case of stimulating the economy. Injections are payments to businesses that not originate from households. Injections consist of investments, tax, interest rates, Community Sector Borrowing Need (PSBR) and exports. Investment is the purchase of capital goods or new equipment by businesses. This can help boost demand because if businesses invest in these things they will need more employees to operate the equipment or sell the new goods purchased. The firms then pay the employees that may create demand because the employees will require to get goods and services. Exports are similar to imports but rather than taking money from the overall economy, it injects money into it. Exports are products being sold to businesses or people internationally. If businesses carry out more exports they will be able to employ more people because additional money will be streaming in to the business. This will then create demand because more folks will have jobs and they'll need to purchase products and services. Therefore more exports will lower unemployment and create more demand. PSBR is now known as the general public Sector Net Cash Requirement (PSNCR). PSNCR is the word used when the government borrow money to pay for activities in the general public sector of the market i. e. income, maintenance on private hospitals etc. This happens when the federal government expenditure exceeds the income of tax revenue. To funding this borrowing the government will sell government bonds or borrow from the public. PSNCR can be an injection because the federal government could utilize it to generate more hospitals, police force departments or local regulators (Enfield council, Barnet council etc) and pay employees to work there. Carrying this out will then create demand because the employees will buy products and services with their wages. Furthermore these employees may also be paying taxes and that will contribute to tax income. Although taxes and passions rates are a leakage if they're increased, they may also be an injection if they are reduced. Accomplishing this will improve the amount of money people have, to invest on goods and services thus creating demand. If the government do this people will vote for them at another basic election because people do not like paying tax or interest.
To conclude we will examine the consequences of international trade on businesses organisations. International trade is importing and exporting and an excessive amount of one or the other can affect the value of a currency thus affecting the price of a product in another country. If the business in the united kingdom would like to buy a car in Germany (import) they can not use pounds because the business in Germany cannot use pounds to pay their workers or buy more materials to manufacture more cars. The business enterprise in Germany use euro's to get this done. Therefore the business in the UK must change their pounds directly into Euros before purchasing and exactly how much Euros they get for a pound depends upon the exchange rate at that present time. Exchange rates are the rate at which one currency is worth in another currency. For example 1 will buy a person 1. 18. Hypothetically suppose for a 1 an individual can get 2 and a car in Germany costs 1000. The business in the UK will only need to pay 500 to purchase one car which will not affect the price tag on the automobile in Germany but the business in the united kingdom can buy two autos for 1000 because 1000 will get them 2000 thus having the ability to get two autos. But if 1 will buy a person 1 then the business in the UK will only have the ability to buy one car for 1000 because 1000 will become 1000 in Germany. However if the great deal of imports are performed the value of the pound will reduce, making it more expensive to transfer from Germany the next time. The value of the pound will lower because demand for the pound will lower as business will be retailing pounds to get other currencies to buy products abroad. That is good if the government needed cut down inflation. Alternatively if a lot of exports are performed it'll increase the value of the pound since there is demand to buy pounds to acquire products in the UK. If the value of the pound is too much it'll be difficult to export goods because businesses far away must pay more to buy goods but it'll be good for the united kingdom to import because they'll be able to purchase more goods than if the worthiness of the pound was low. If the worthiness of the pound is low it has the opposite impact which is good if the government needed to have the economy out of any recession. If the worthiness of the pound is too low the lender of Britain could improve the interest levels to attract international investors. The traders would want to buy pounds to place into a UK bank account and gain interest on the money deposited. For example in 1992 the worthiness of the pound possessed decreased a lot interest levels were increased from 10% to 15% in an effort to improve the value again. Despite the fact that increasing rates of interest is good the upsurge in value of the pound it isn't best for the domestic economy because people with mortgages and credit cards will have to pay back the high interest which might not be affordable.
The government's major objective is to manage the economy; this is because the market is the foundation of a country. If it is not done correctly maybe it's a disaster for everybody in the united kingdom. The federal government have the required tools to regulate the overall economy but how they use these tools will determine if they will be voted back into power and the way the economy prospers. When the economy is handled well the politics party in power will be voted back into power which is their main purpose.
In conclusion it is possible to say that the UK government can take care of the current economic climate with the various tools they possess. For example when there is inflation the government use leakages (tax payments, savings, interest rates and imports) to diminish demand and lower inflation. When there is a recession the government will use injections (investments, tax, interest levels, Community Sector Borrowing Necessity (PSBR) and exports) to increase demand and reduce unemployment. But on the other hands we can say that the united kingdom government cannot deal with the economy. This can be said because even although tools can affect the economy, they aren't powerful enough to avoid the current economic climate from going into a recession. This is proven with today's current climate. The current financial meltdown, the great major depression and the tough economy in the 1970's are perfect examples of the government not having the ability to control the market.
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