Introduction to the UK Economy

How big is the UK economy?The UK economy is the 7th largest in the world, with

an annual GDP of around £1.35 trillion, or £1350 billion, or £1,350,000,000,000.

GDP means Gross Domestic Product, and this represents the value of all things made and all services supplied in an economy - all output.

If we divided the value of the economy evenly amongst the whole population, each person would receive around £21,000. This division is called GDP per capita, and on this calculation the UK is the 17th highest in the world. Some of the poorest counties in the world have a GDP per capita of less than £400!

The Business Cycle On average the UK economy grows by around 2.5% a year, this

growth rate is enough to double wealth in around 35 years. But the economy does not grow at a steady rate. The chart below shows growth rates over the last 3 years. The figures for 2008-9 are negative. During this period the economy shrunk in size – output fell.

The business cycle

BoomThe boom period, which can last for 2 or 3

years, benefits most firms and consumers. Unemployment is low , consumer demand

is strong, profits for firms are high and there can be a budget surplus for the government caused by high tax revenues and lower expenditure on Social Security.

But high levels of demand can increase prices, workers often demand higher wages, pushing up firms’ costs.

DownturnFollowing a boom often comes a downturn –

there is less investment by firms—business owners and managers become nervous about the future and start to cut back.

Higher inflation in a boom may have caused the Bank of England to increase interest rates, so people are spending less, unemployment starts to creep up.

The economy may still be growing, but at a much lower rate. In a boom the economy can grow by 4% in a year, in downturn growth will slip to around 1%.

RecessionSometimes a downturn turns into a recession –

the economy starts to shrink in size. If we have a recession we can see rapidly

increasing unemployment, fast falling demand from consumers, falling investment by firms and a decline in the levels of inflation and interest rates.

Between 2008 and the middle of 2010 we saw in the UK the longest recession since the Second World War.

Unemployment increased by over 1 million, and many big firms like Borders and Woolworths went bust.

RecoveryHopefully the recession will soon turn into a recovery. Firms start to see business opportunities, the cost of

borrowing can be low, so investment by firms will start to increase.

New jobs are created so unemployment falls and consumers start to spend again.

New firms start up and profits should begin to increase.

Confidence grows, people are now much more willing to spend money on big ticket items like cars.

Firms see their sales rising, so take on new workers. Growth increases to 2% or more—much higher and

we will be back in a boom.