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UK Economy and its economic system

Summary:

United Kingdom is the world’s largest economy that had colonized many countries and

islands during the Victorian period to exploit their resources while soothing their personal greed.

However, the present situation of UK has changed and the colonial period has finally ended. The

United Kingdom is the world’s 5th largest economy in terms of GDP and 9th largest when

compared to the purchasing power parity. UK is comprised of England, Scotland, Wales and

Northern Ireland and had the second largest outward foreign direct investment. UK specializes in

providing financial services and 78% of its GDP relies solely on financial services which brings

the maximum revenue for the economy. The economy is also boosted by the North South oil and

gas production.

Task 1

A.

Resources are limited, however our demands are infinite. This is the prime reasons why

there are suppliers present within an economy who impose a price level so that the resources

available can only be enjoyed by the ones who can afford to pay for those. That is why, we must

learn to effectively allocate the resources available for us to use and consider trade-offs so that

we can successfully meet our infinite wants (Wells, 2015). Without the presence of scarcity,

human beings would not have understood the basic principles in Economics which is basically

the study of production, distribution and consumption of goods and services. Without proper

study of Economics, producers/suppliers would have had utilized the infinite amount of

resources to satisfy the unlimited wants of people. Sometimes we have to forego consumption of

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one good/service over another because resources are limited, which is known as opportunity

cost. Students have often asked why some scarce goods are more expensive than other scarce

goods. There are two answers for that question, one either the resources required to produce the

goods are rare or there is a higher demand for the scarce good (Wells, 2015). However, if the

infinite wants and needs can be taken care of by the resources needed to produce the goods, the

good itself is no longer scarce and one does not need to pay to enjoy the benefits of such goods.

One free good is the air we breathe in and the street lights which help us to find our way in the

dark. All these goods are consumed for free therefore, such goods are not scarce.

Allocation of resources is essential for businesses to attain success and it has been found

out that Britain ceased allocating its resources from 1998- 2007 and economists concluded that,

if Britain had always maintained its resource allocation, GDP growth would have had 7.4% more

than it was which was equivalent to $96 billion of lost GDP (Nesta, 2014). In order to overcome

the problem, economists have offered various policies which they believed to improve the

economic conditions of UK. The barriers for growth of business sectors must be removed after

which, businesses can easily thrive without experiencing problems. Secondly, it was also

important for government officials in UK to determine the possible causes of businesses to exit

the market and then take appropriate measures to deal with the problems and make it favorable

for well established businesses to stay in the market and help to raise the growth of GDP of UK.

Finally, government of UK must emphasize more on quality than quantity when considering

entrepreneurships. It is more favorable and productive for an economy if an economy is

comprised of only few good quality entrepreneurs instead of having a large number of

unproductive entrepreneurs who are only wasting resources and degrading the economy of UK

(Nesta, 2014). An efficient allocation of goods and services can be attained by the forces of

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demand and supply in the market as well as at the price the goods are being sold in the market

(price mechanism).

Standard Chartered Bank Ltd. Is one of the largest banks which has established itself

outside the boundaries of UK providing various types of financial services to its customers? This

is one of the institutions which have always managed to bring positive results for UK since the

company has always allocated its resources in the most feasible manner to avoid downfall. One

of the primary methods for allocating resources is by planning a proper budget, by only investing

money into aspects which are demanded more from potential consumers.

Market equilibrium can be achieved when the forces of demand and supply meet at one

specific point which benefits the buyer as well as the supplier. Buyers want to buy at the lowest

price whereas the suppliers want to sell at the most profitable price. The market equilibrium price

is the most appropriate price level at which both the parties (buyer and seller) choose to

exchange goods for money. The equilibrium price and quantity can be achieved when demand

and supply prices are both equal including the quantity demanded and supplied (Amos Web,

2015). It is also stated that, market equilibrium is also stable equilibrium, any surplus or deficit

present in the market will be automatically adjusted by the flexibility of the price level which

will restore equilibrium.

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B.

Generally, there are 5 different types of market systems observed in an economy and they

are (Richards, 2015):

i. Perfect Competition which is comprised of many buyers and sellers. According to classical

economists, there are infinite numbers of buyers and sellers present in the market, therefore it is

not possible to manipulate price level by one individual buyer/seller.

ii. Monopoly is the exact opposite of perfect competition in which one single producer of

a good/service who can charge any price he wants. On top of that, there are no substitutes

available, as a result, customers can not switch to a substitute due to rise in price level.

iii. Oligopoly It is somewhat similar to monopoly, however, there are a number of

producers who are working together to set the price level of a good or service. Even though

oligopolists do not have strong control over the price level, the government must inspect the

producers to prevent them from colluding with one another and together charge abnormal price

to their customers.

iv. Monopolistic Competition is a mixture of perfectly competitive and monopoly. There

are also numerous numbers of competitors in the market for which, one competitor is slightly

different from the other competitor and has the ability to charge higher prices from their

customers.

v. Monopsony market systems may differ depending on the number of sellers as well as

the number of buyers. A monopsony market system has only one buyer for a particular good or

service, hence the buyer has also strong purchasing power.

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Since resources are limited but our wants are unlimited, putting a price on individual

goods prevents resources from getting wasted by our infinite wants. For that, when we choose

one good over another, the foregone good or service is the result of opportunity cost. Standard

Chartered Bank Ltd. is one of the top leading market banks which established itself in the year of

1969. The headquarter is located in London, and the bank managed to expand its reach in various

parts of Asia as well as Africa. In order to establish itself successfully, Standard Chartered Bank

has also adopted various strategies to topple other banking institutions in the market.

Maintaining cost is one of the primary activities of Standard Chartered Bank for which it

has always considered different types of opportunity costs to utilize their resources. With the

finite amount of profit generated through various types of interests and bonds, they can either

choose to open another branch in some parts of Middle East or invest it into a more profitable

business to generate increased profit. Opening up a new branch in some parts of Middle East will

incur costs; on the other hand, investing into a new business or to hire a special analyst will also

cost them to spend the money. Since wants are unlimited and resources are limited, Standard

Chartered Bank Ltd. also undertook various types of opportunity costs and compared their

options and finally agreed upon the best alternative, hence turning the unchosen option as the

opportunity cost. SCBL realized that most of its financial decisions have always impacted people

and the surrounding environment in which they are carrying out the business. As a result, this

financial institution has introduced Green Banking system which ensures minimal usage of

minerals and fossil fuels along with child labor, climate change and water. The Green Banking

System clearly states all the social standards which are being followed by the institution itself as

well as the clients of SCBL. The financing approach of the bank allows it to anticipate the risks

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at an early stage and provide the most feasible solution to solve the issue before it can turn

malevolent (SCB, 2013).

C.

Elasticity of demand is a numerical figure which shows the responsiveness of one

economic variable following a change in another influencing variable which is usually

independent (Bamford, 2005). In a simpler manner, elasticity measures how the demand of one

product will be affected due to any changes in price. The formula for calculating the elasticity of

a product is

Elasticity = % change in quantity demanded of a product/% change in price of the product.

The result of the calculation will determine how many of the product will be demanded

due to change in its price level. Result below 1 shows the product is inelastic to changes in price

level, meaning the quantity demanded of the product will vary insignificantly due to any change

in its price, consequently, result above 1 shows the product is extremely reactive to its price

changes. A slight change in price level will drastically affect the quantity demanded of the

product.

In reality, the elasticity of demand can be observed by the intensity of competition

prevailing in the same market. Since there are many banking sectors available within an

economy these days, the level of competition for SCB is also very extreme. If the interest for

borrowing loans in SCB is higher compared to another bank for example Metlife, businessmen

or other clients will automatically choose to borrow from Metlife given that they both are

providing the similar sum of money and other benefits. This is highly important for anticipation

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because businesses have to realize their customers’ preferences before they can charge the most

suitable price.

Task 2

A.

Standard Chartered Bank (SCB) experienced implications on its pricing and corporate

objectives. They believe that millions of people all over the globe are not receiving the proper

banking services and hence restricted their economic mobility. Therefore, SCB’s main motive is

to expand its financial services to everyone as a result, people can enjoy better access to their

savings and enjoy the fruits of their labor from any part of the world. The recent natural disaster

in Nepal has affected huge number of people, for which SCB has made a donation box into

which donations from people living in various parts of the world can be assimilated and donated

in the funds of Nepal to financially support the country and bring back order and peace in the

country (SCB, 2015). One of the main objectives of SCB is to provide support for SMEs (Small

and medium enterprises) which provides job opportunities to the people. The bank lets the SMEs

borrow credit at a reasonable interest rate, and this eventually assists the business to develop and

provide further benefits to the people.

B.

Within a Perfect Competition market, there are large numbers of buyers and sellers. For

this type of marketing approach, the interest charged from the clients must be feasible enough so

that, businesses can grow as well as pay the sum of money without experiencing troubles. Since

there are many banks present, it will be wise to charge the best interest rate so that consumers do

not choose a different bank over SCB.

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Within a Monopoly market, there is only one producer for which, SCB has the authority

to charge the maximum interest rate to retain the most profits. However, in doing so, they will

completely lose all the trust and faith from their clients by defying their own policies and

objectives.

An oligopolistic market structure consists of a large number of sellers who can collude

together to charge the most appropriate interest rate decided by all the banks together. In this

way, the price war can be evaded and thus everyone can be satisfied. Government intervention

takes place to ensure that clients are not charged abnormal amount of interest rate, otherwise, the

government holds the right to suspend its operations present in the country.

In monopolistic competition, it is a mixture of perfect competition and monopoly. But

only if SCB can introduce a unique aspect of itself, it can easily charge higher interest rate from

its clients. If a client is provided with an extra benefit which is not provided by the rest, it will

naturally attract more clients.

In a monopsony market, there will be only one buyer and that’s why, the bank must

charge the best price from its client as the client is also entitled to a lot of purchasing power.

C.

The government of UK has adopted various laws to keep its banking system under

control and deter them from exploiting people who seek for loans and other financial assistances.

The government has imposed higher standards of conduct for severe crimes committed

by defaulters by introducing criminal sanctions.

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Provide protection for depositors under the Financial Services Compensation in case if the bank

undergoes insolvency.

Government provides support to the banks so that they can absorb more losses.

Banks are entitled to keep separate details regarding retailing investment and personal. In

this way, the government can also determine the exact information about retailer and personal

loans which are needed sometimes for publishing the data and analysis of a country (Osborne,

2015).

Task 3:

A

The economy system of UK has been flexible and its laws and regulations are also

renewed or altered so that, businesses with the most preemptive goods or services could also

establish themselves and earn profit. During the colonial period, Britain was considered to be the

most influential and strongest nation that colonized almost the whole world. However, the nation

slightly degraded especially after First and Second World War. The incurred damages within the

nation of UK due to both the World Wars are beyond our imagination leaving nothing but blood,

dead bodies and destructions. The country eventually managed to recover itself from the

extensive losses however, it failed to regain its position as the supreme nation of the globe.

Besides, the World Wars the country also suffered severe financial crisis in the year of 2008

which was also another setback for the economy in UK. To be able to sustain the setbacks, the

government of UK adopted new regulations and introduced changes in its operation (Economy

Watch, 2013). UK is blessed with large amount of fuels and various types of natural resources,

the nation was ranked 4th among the top suppliers of coal, but the production fell by 75% and

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now considered rank 15th for him (Economy Watch, 2013). Due to a gradual progress of the

economy, a barrier has been formed to divide the Northerners and Southerners of UK. The recent

findings state that, 1.4% of labor force is involved into agriculture, 18.4% in industries and

80.4% into services (Economy Watch, 2013). Till now, banking and finance are the two most

crucial services with London considered one of the center commands along with New York and

Tokyo.

Standard Chartered Bank Ltd has branches in Europe, Asia, Africa and Middle East with

the central decision makers taking all the important decisions required for the welfare of the

business. Sometimes, the governing managers are interchanged among the branches to establish

proper and strict control over the organization, hence the banking company has interchanged its

managers and replaced one with another so that it helps to establish a smooth organizational

structure within an organization. The Regional Head of South East Asia was sent to East region

and simultaneously the Regional Head of North East Asia was appointed to take care of West

region. This is mainly done to make sure that certain weak regions can be appointed with better

leaders for improving the workforce and operations of the branch. Moreover, they have

established a good relationship with their respective clients which eventually helped them to

increase the number of clients they provide services to (Standard Chartered, 2014).

B.

To understand the macroeconomic policy changes, economists have introduced a number

of tools which help us for identification.

i. Fiscal policy is used to understand government spending, the types and levels of tax

imposed on government bonding. Government can adopt certain measures which can directly

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influence economic activities. It is mainly done by bringing recurring capital expenditure, direct

spending of government into the economy to open job sectors for people, imposing taxes on

goods along with donations and different money transfers on private consumption, investments

and exports (Dolamore, 2015).

ii. Monetary policy’s main function is to change the rate of cash by controlling the supply of

notes available in the state banks all over the world.

iii. Exchange Rate policy will help us to understand the value of our currency against the

value of another currency. Exchange rate is important for imports and exports depending on

which we receive our payments (Dolamore, 2015).

C.

Ever since the depression in the year of 2008, UK has adopted unique sets of policies in

terms of money supply which is manipulating the interest rates to alter the consumption of

people and the aggregate demand. The Bank of England introduced Quantitative Easing which is

basically using electronic money for buying out assets. During times of depression, the interest

level is cut down so that large number of people have access to money as it also reduces

borrowing costs. During quick growth of the economy, the interest rate is increased again to

reduce the pressure of inflation (Pettinger, 2012). The improvements within the economy has

become more promising as the GDP rose from 1.8% in 2013 to 2.6% in 2014 (PwC, 2015). The

growth in UK’s GDP has been primarily for the service sectors such as banks, insurance

companies and various other financial services, moreover the similar growth rate has been

observed in UK’s manufacturing industries too, hence indicating a clear growth in UK’s GDP.

The inflation rate of UK has remained the same while it slightly deviated and the monetary

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policy committee has urged to lower the interest rate and slowly increase during the course of

2015 which will rise up to 4% by the year of 2020. Considering all the classes of people living in

UK, it was found out that the real income is below 7% and the consumer price inflation for low

and middle class families has been 40% since 2003 and 30% among the wealthiest families

living in UK (PwC, 2015). Government of UK is still investing in textiles and advanced.

Besides, the unemployment level of UK is another important factor which is comprised of able

and fit labors that can work and become productive.

Standard Chartered Bank has managed to capture clients from all over the world,

therefore, as increasing number of clients are borrowing money from SCB, the bank itself is

earning large sum of money from the foreign clients which is helping the economy to boost. This

will eventually improve the GDP level of UK hence earning more money for the country.

Standard Chartered Bank, even though it is a private bank, but it maintains strong ties with the

central bank which limits the number of money or notes to restrict inflation. Higher inflation rate

will raise the consumer price index therefore making it more problematic for transactions in the

market. In terms of unemployment, SCB is regularly hiring educated people in their banks

located in many parts of the world. Each branch of the bank hires employees from individual

countries, hence making it possible for a large number of people to help them to earn their living.

Task 4

A

Countries have often proved to be more successful because of two types of advantages,

and one of the advantages is comparative advantage when one country has the ability to produce

a good or service at a lower opportunity cost compared to another country, in other words at a

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lower opportunity cost. According to economists, they have stated if countries produced goods

depending on comparative advantage, the finite amount of resources can be wasted less at the

same time, the economy develops (Pettinger, 2012).

Standard Chartered Bank Ltd has developed its brand name which itself has become an

intangible asset for the company. Brand differentiation has enabled the company to attain a

strong comparative advantage over any other banks located around the globe.

Secondly, Corporate Social Responsibility (CSR) which is an internal resource followed

by any company in order to enjoy competitive advantage. Resources include good inspection of

corporate governance, to create positive externalities by funding social environmental projects

and develop good ethical management system within the organization.

Most importantly, the bank has managed to establish a positive image and thus, more

people will choose Standard Chartered Bank over any other banks located in the area. This

eventually assisted the bank to develop a strong and healthy relationship with the clients in order

to generate positive word of mouth about SCB.

Free Trade:

In terms of economics, the free trader refers to the removal of all barriers between

countries so that they can successfully execute a business deal among themselves at the most

appropriate and feasible costs.

Advantages of Free Trade:

a. Better understanding between the countries under one alliance.

b. People have access to a large variety of goods.

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c. Able to accentuate competition within a market, as a result, local companies also utilize

the appropriate and best resources necessary to produce one good.

d. Higher standard of living among the locals and ensures economic growth.

Disadvantages of Free Trade:

a. The new entrants in the market cannot survive with minimal capital with already existing

rivals which have attained comparative advantage.

b. As there are no barriers between the two countries, the stronger country can easily

manipulate the government body of the other country to manipulate the system.

c. For agricultural economies, the prices of their exports is much lesser compared to the

finished goods the country imports from a developed country, thus it fosters deficit in the current

account balance of the agricultural economy.

d. Finally, it can increase pollution and generate extraneous wastes of its resources.

B.

Right after the World Cup, the leaders of state from Brazil, Russia, China, India and

South Africa agreed to formulate a New Development Bank with the headquarter situated in

Shanghai.

With each member countries invested $10 billion, the initial capital has risen to $50

billion in total with a separate $100 billion incentives stored in reserve as contingency (Vreeland,

2014). With the introduction of the Development Bank within the regions of South-Asia, Europe

and Africa, the competition level of SCB will become more intense as their rival will be funded

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by 5 huge nations access to a large capital and easily take over the market of Standard Chartered

Bank. The BRICS bank will ultimately raise the stake level for IMF banking sectors by taking

over funding for emergency services, emergency borrowing and funding for victims of war and

natural disasters (Vreeland, 2014). The loans issued by the BRICS bank can easily outweigh the

loans from other private banks. This as a result will help to finance other private constructors to

build strong infrastructure of a country. The loan system will be less complicated, however the

system will be implementing strict rules and regulations in order to minimize the bank defaulters.

A separate monitoring and inspecting body which will continuously check the profiles of their

clients to prevent them from violating laws. With the right level of determination and dedication

BRICS bank can establish a good brand name which can also threaten the competitive advantage

of Standard Chartered Bank.

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