QUESTION
choose
one of the following tropic CBI says UK economy will return to growth this year by scott reid.
website :http://www.scotsman.com/the-scotsman/business/cbi-says-uk-economy-will-return-to-growth-this-year-1-2270876. This article is related to GDP , its related to my book essential of economics chapter 12.
book is written by hubbard, lewis.
MILAN/LONDON: World food prices eased in April after rising in the first quarter of this year, the United Nation’s food agency said, but inflation worries are still simmering as soybean prices climb.
Record high food prices last February helped to fuel the Arab Spring uprisings in the Middle East and North Africa. Prices receded in the second half of 2011 but the uptrend resumed in January.
The FAO Food Price Index, which measures monthly price changes for a food basket of cereals, oilseeds, dairy, meat and sugar, averaged 214 points in April, down from revised 217 in March, the UN’s Food and Agriculture Organisation (FAO) said on Thursday.
Yet soybean prices – at their highest since July 2008 – are likely to rise further due to tight supplies, driving corn prices higher, the agency’s senior economist said.
The index drop reflected a 2.5 percent month-on-month fall in maize prices, a 1 percent fall in wheat and a 5 percent drop in sugar prices, which offset a 2.2 percent rise in vegetable oils fuelled by soaring soybean prices.
“You would see prices most likely remaining under downward pressure in the next couple of months,” the FAO’s senior economist and grain analyst Abdolreza Abbassian told Reuters, adding that weather remained a critical factor.
The index seems to have stabilised at a relatively high level of around 214 points, the FAO said in a monthly update.
Last week, the World Bank said costlier oil, strong demand from Asia and bad weather had been pushing up global food prices, adding that if current production forecasts for 2012/2013 do not materialize, prices could reach higher levels.
U.S. soybean futures, one of the major drivers on international grain markets in the past few months, have been fuelled by continuous purchases from China, the world’s largest buyer.
“For the (FAO) index, the conditions associated with oilseeds especially have been supportive,” Rabobanksenior commodity analyst Keith Flury said.
BIGGER CROPS, TIGHT MARKET
While record total cereal crops are expected this year, strong demand coupled with low initial stocks are likely to lead to tight supplies of coarse grains and soybeans which would support prices, the FAO said in its Food Outlook.
The FAO has cut its outlook for the world new crop wheat output to 675 million tonnes from an earlier forecast of 690 million, down 3.6 percent from last year, citing output falls in Ukraine, Kazakhstan, China, Morocco and the European Union.
International wheat prices in 2012/13 are expected to average lower than in the previous crop year, despite smaller crops and shrinking stocks, due to a fall in consumption and large export supplies, the FAO said.
World cereals output is expected to rise in 2012/13 crop year by 1.1 percent to a record 2.371 billion tonnes, boosting closely watched stocks by 1.7 percent to 524 million tonnes at the end of the 2012/13 seasons, the agency said in its first forecast of new grain crops.
Coarse grains production is seen rising 3.7 percent to 1.207 billion tonnes, driven by a 4.1 percent increase in maize (corn) output to 916 million tonnes, the agency said citing preliminary forecasts.
But the coarse grains market is set to remain tight due to very low level of stocks, providing further support to prices, it said.
World prices of oilcrops and their derived products, which have been rising since the start of this year, are likely to remain firm due to an increasingly tight supply and demand situation of the current season, it said.
World soybean output is estimated to fall 9.5 percent to 240 million tonnes in 2011/12 year and the likelihood that soybeans would have to compete for cropland with maize, especially in the United States, in 2012/13 adds further support to prices, it said.
SOLUTION
Economic Growth in UK
Introduction
Economic growth is the increase in the quantity of goods and services produced in a nation. This in turn depends upon the demand for goods and services in the nation. If the demand grows then only the production will grow so as to match the demand. Economic growth of a nation is calculated by calculating the rate of increase in real Gross Domestic Product (GDP).Real GDP can be obtained by adjusting the GDP for inflation ( Hubbard.G ,Garnett A,Lewis P & O’Brien T,2009).
Economic Growth is not necessarily an indicator of the state of well being of a country. If a country shows decreasing Economic Growth then it does not necessarily mean that the country is on decline mode. The reasons for increase or decrease in Economic Growth need to be assessed and it is in the reasons that we can find indications and solutions regarding a country’s situation.
Various theories have been put forward to explain Economic Growth. In the theories we can find the possible reasons for the state of Economy of a nation. We can assess the theories vis a vis the economic data of the country and draw conclusions regarding reasons for the economic state , required actions etc.
The following table provides a brief synopsis of the major Economic Theories propounded so far
| Theory Era | Major Contributors | Major Contributions | Implications |
| Classical Growth Theory | Adam Smith, David Hume | Economic growth is due to capital employed to harness the productive capacity. Trade is an important contributor to GDP | Country’s should identify their productive capacities and invest capital in those arenas so as to maximize Return on Investment and hence Economic Growth. Foreign trade is also significant. |
| The Neo Classical Growth Model | Robert Solow, Trevor Swan | Application of law of returns to state of Economy. Economy in a diminishing returns to scale state will have decreasing Economic growth. | Economic growth reaches a stabilization state and thereafter to boost it appropriate technological interventions are required. |
| Endogenous Growth Theory | Paul Romer, Robert Lucas Jr,J.J.Puthekalam | The concept of Human Capital vis a vis Physical Capital.Human capital have increasing rates of return and hence economic growth should not reach a steady state | Growth depends on what type of capital nations invest in.Investing in Human Capital by way of socio economic measures. |
| Ayres Warr Model | International Institute for Applied Systems Analysis | Relates efficiency of energy utilization with Economic Growth | Efficient use of energy and energy resources, renewable sources of energy, conservation of energy |
| Cognitive Capitalism Theory | Heiner Rindermann and James Thompson. | Relates economic growth with the cognitive ability or intelligence of a nation’s people and states that cognitive ability can set up a virtuous cycle of economic growth | Nations should invest in knowledge and education of its people |
Economic Growth and United Kingdom (www.tradingeconomies.com,2012)
In the first quarter of 2012 GDP has decreased by 0.2 % over the last year’s quarter.The economy has shown average quarterly GDP growth rate of 0.58% from 1955 to 2011.The maximum GDP recorded during this period was 5.3% in March 1973 and -2.5 % in March 1974.
Major Features of UK Economy
- One of the most developed economies in the world
- Dominance of service sector
- Banking, Insurance, Business Services are major contributors to GDP.
- Decreasing contribution of industry sector to GDP
- Reduction in Public Ownership by UK Government
- Investment in Social Welfare and Human Capital.
It can be seen from the above graph that post 1991 levels of GDP has declined as compared to the period before 1980.This can be to some extent attributed to the Neo Classical theories. Since UK is one of the most developed nations of the world, it has utilized its existing resources to the maximum.
A Comparison of UK Economy with Other Major Economies
It can be seen from the graph above that developing nations China and India are showing high economic growths. This can be to some extent attributed to The Neo Classical theories, the developing nations have yet to reach their maximum potential. Yet at the same time it should also take into consideration that other developed nations such as USA, Canada and Australia are showing economic growth rates above 2% and Eurozone countries like France and Germany are showing Economic Growth above 1.4%.Though these nations are ‘newer’ nations but stagnancy should not be allowed to enter the Economic system. The economy can be rejuvenated by undertaking technological interventions, expanding and exploring the foreign trade market and investing in human and cognitive capital,revisiting and reformulating Government policies, in accordance with the concepts of the Endogenous and Cognitive Capitalism Theory.(www.tradingeconomies.com,2012)
Future Predictions for Economic Growth of UK (www.economies.pwc.com,2012)
The above is GDP movement for the entire Eurozone,UK being one of the important and influential members.The prediction is based on four major scenarios and we can see from graph that around mid of 2012 GDP is expected to rise as per scenarios 2,3,4.
As per the forecast, the following aspects were mentioned for UK:
- Action by Governments (Eurozone) to resolve increasing market pressures and crisis is likely to improve Economic Growth.
- High inflation and recession among Eurozone nations, a major cause influencing GDP movements in UK.
- UK is likely to face decline in exports and also problems related to the banking sector.
- UK is likely to see increase in capital inflows as investors will seek safer markets.
- The Eurozone accounts for almost 50% of UK’s exports, and recession in Eurozone is likely to have negative affects on the Economic Growth of UK.
Conclusion
The Economic Growth of a nation is affected by several internal and external factors. External factors include global recession, policy changes in trading nations, extent of foreign trade.
The internal factors include policies of the government, resource utilization.
UK is a developed economy and has been able to maximize the utilization of its resources. In order to further increase its Economic Growth, it can look to investing more in human capital, undertaking technological interventions and efficient utilization of Energy Resources.
Reference
Hubbard.G ,Garnett A,Lewis P & O’Brien T,2009.Essentials of Economics. Australia:Pearson Education
www.trading economies.com,2012. United Kingdom GDP Growth Rate. [Online] Available at: http://www.tradingeconomics.com/united-kingdom/gdp-growth [Accessed 5 May 2012].
www.economics.pwc.com, 2012. What nest for Eurozone? Possible scenarios for 2012 [Online] Available at: http://www.pwc.co.uk/the-economy/issues/gdpgrowth.jhtml [Accessed 5 May 2012].
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