FACULTY OF BUSINESS AND MANAGEMENT

DIPLOMA IN OFFICE MANAGEMENT AND TECHNOLOGY

(MBA1183F)

PRINCIPLES OF ECONOMICS
(ECO120)

REPORT OF CASE STUDY

(UNITED KINGDOM)

Prepared For:
MDM NORLIDA TENDOT BINTI ABU BAKAR

Prepared By:

NO. NAME STUDENT ID

1. KHAIRUNISA A.KARIM 2019805736
2. FATIN EZZATEE BINTI MOHD MUSTABILAH 2019236564
3. WAN RAUHAH ADABIAH BINTI WAN RASHIDI 2019255592
4. NUR NADIA BINTI MOHAMMAD ZULKAFLI 2019806426
5. AINA SYAHIRA BINTI MORNI 2019410756
6. NUR IZYAN AZREEN BINTI SHAHHAIZAD 2019222962
 CONTENT

1.0 INTRODUCTION 2

2.0 INFLATION 3

2.1 Inflation in United Kingdom 3

2.2 Issue of Inflation 4

2.3 Cause of Inflation 4-7

2.4 Effecst of Inflation 8-9

2.5 Measures to Control Inflation 9 - 10

3.0 UNEMPLOYMENT 10

3.1 Unemployment in United Kingdom 10 - 11

3.2 Issue of Unemployment 11 -12

3.3 Cause of Unemployment 12- 14

3.4 Effect of Unemployment 15

3.5 Measures to Control Unemployment 16 - 17

CONCLUSION 18

REFERENCES 19

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1.0 INTRODUCTION

The United Kingdom of Great Britain and Northern Ireland could be a sovereign
nation situated off the north-western coast of The European mainland, generally referred to
as the UK or Britain. UK is additionally referred to as UK. The UK contains a partially
regulated economy. The economy is characterized as a social domain that emphasize the
activities, discourses, and material expressions related to the assembly, use, and
management of resources. Over the past decade, the economy of the UK has steadily
increased the ranks of the mostly free. The economy of the UK could be a highly developed
social market and market-orientated economy.

A highly developed and market-oriented social market is that the economy of the UK.
it's the fifth largest national in terms of nominal gross domestic product (GDP), ninth largest
in terms of buying power parity (PPP) and twenty-second largest in terms of per capita GDP,
accounting for 3.3% of world GDP. After the US, China, Japan and Germany, this country
continues to possess the fifth highest GDP within the world. within the north, the United
Kingdom economy is seeing more growth. To be popular within the UK, you are doing not
should be in London. In reality, in areas like Manchester, more new companies are being
developed within the north than in the other area within the UK.

The first nation to become industrialized was the UK within the 18th century. It had a
dominant position within the global economy during the 19th century, accounting for 9.1 per
cent of the GDP of the globe in 1870. within the us and also the German Empire, the Second
technological revolution was also quickly happening. This posed the UK with a growing
economic challenge. the prices of war I and war II fighting further undermined the relative
role of the United Kingdom. the United Kingdom maintains the flexibility to project strength
and influence round the world within the 21st century.

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2.0 INFLATION

Inflation can be defined as a continuous increase in the general price level of goods
and services in the economy. It is a condition that produces a rising trend in the general
price level in the economy according to public understanding.

2.1 INFLATION IN UNITED KINGDOM

The United Kingdom has a market economy that is partly regulated. The United
Kingdom is the world's fifth largest economy and the second largest after Germany in
continental Europe. Commenting about the economy, what can be linked is inflation.
Inflation is the increase in prices for most goods and services. Prices for most of these items
should rise and continue for a long time to say that inflation has taken place in a country's
economy because not all increases are inflation related.

In the United Kingdom, transport 16 percent of the total weight and leisure and
culture are the most relevant groups in the consumer price index which is 15 percent.
Housing, water, electricity, gas and other fuels make up 13%; 12% for restaurants and hotels
and 10% for food and non-alcoholic beverages. The index also covers, various products and
services,9%, clothing and footwear, 7%, furniture, household appliances and repair 9%. 6
percent, food contact and education account for the remaining 11 per cent of the overall
weight of alcoholic drinks and tobacco.

But inflation often occurs unexpectedly due to the effects of unemployment, a decline
in the value of the currency and political instability. In conclusion, the government plays an
important role in ensuring that prices are always stable so that inflation can be controlled.

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2.3 ISSUE OF INFLATION

(Average rate 2010 – 2019)

 UK inflation rate for 2019 was 1.74%, a 0.55% decline from 2018.
 UK inflation rate for 2018 was 2.29%, a 0.27% decline from 2017.
 UK inflation rate for 2017 was 2.56%, a 1.55% increase from 2016.
 UK inflation rate for 2016 was 1.01%, a 0.64% increase from 2015.

2.4 CAUSES OF INFLATION

I. Demand-Pull Inflation

(Income Rate % Change Over 12 Hours July 2017)

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 Demand-pull inflation is the most conventional form of inflation. Inflation in demand-
pull happens when aggregate demand (AD) exceeds the aggregate supply. It is caused by
an increase in AD that could be caused by an increase in market demand, or by an increase
in the level of government spending, or by an increase in business expenditure, or by an
increase in the country's export demand from people living abroad, or a combination of four.
This means that it will move to the right of the AD curve.

The demand-pull inflation study by Keynes assumes that aggregate demand exceeds
aggregate supply at full employment. If all the resources available are already fully
employed, the economy is trying to produce beyond its potential and, as a result,
expenditure is dragging the price level upwards. The meaning of demand-pull inflation is
that "too much money is chasing too few goods."

A booming economy or an economy that is close to the end of the economic cycle is
synonymous with demand-pull inflation. Based on the above picture, the UK experienced
rapid economic growth towards the end of the 1980s. This 4-5% growth a year was slightly
higher than the long-term average rate of economic growth in the UK. This excessive
economic growth resulted in 8% demand-pull inflation.

The Lawson Boom of the late 1980s

(UK Inflation and Economic Growth 1982 - 1992)

UK economic growth was well above the long-term average rate of 2.5% between
1985-1988. Inflation had risen to 9.5% by 1990.

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 A textbook example of a 'boom and bust' economic cycle was the Lawson boom of
the late 1980s. The late 1980s were a period of fast economic development. This was
attributed to rising house prices, cuts in taxes, lower interest rates and a high level of
confidence. However, an increase in inflation and a greater current account deficit were
caused by the boom.

II. Cost-push Inflation

Cost-push inflation refer to an increase in the general price level associated with an
increase in the cost of production. Cost-push inflation is the result of the sellers’ activities.
In other words, inflation occurs due to the increase in the costs or supply prices of goods
caused by an increase in the cost of inputs.

(UK Inflation 2010 – 2013)

In 2011, CPI inflation reached 5%, however, if we exclude the impact of taxes (CPI-
CT) inflation was 3%. If the effects of higher product costs (from depreciation) were not
omitted, inflation may have been much lower.

Other economists may feel that inflation perceptions may be influenced by temporary
cost push variables. They will negotiate for higher wages if people see higher inflation, and
therefore the temporary cost-push inflation becomes sustained.
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 (Annual CPI inflation rate 1968 -1982)

a) Wage-push inflation
Wage-push inflation occurs due to an increase in the wage level which will lead to an
increase in the cost of production and the output price. The wage level may increase due to
organized labour unions seeking further wage increases through their collective bargaining
strength or the firm’s increasing wages to avoid the migration of workers to other firms.

Since the government said it will lift the official minimum wage, almost 3 million
employees in the United Kingdom are scheduled to earn a salary rise of more than four
times the rate of inflation as of April. The government said the "national living wage" for
over-25s will grow from £ 8.21 an hour to £ 8.72 from the beginning of April 2019 in an
announcement intended to pursue low-paid staff in the immediate aftermath of Boris
Johnson's election win.

b) Profit-push inflation
Profit-push inflation occurs when certain producers or monopolists stock up on goods
and create an artificial shortage which will increase the price on these goods, thereby giving
them higher profits.

c) Import-push inflation
Import-push inflation occurs when the prices of imported raw materials or finished
goods increase. This may be due to the fluctuation of the foreign exchange rate. This will
lead to an increase in production costs and eventually an increase in the price of outputs.

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2.3 EFFECTS OF INFLATION

A continuous rising price level of goods and services has impacted the consumer’s
income and expenditure pattern as the money value has fallen and lesser goods can be
purchase.

I. Distribution of income

Inflation alters the current pattern of income and wealth distribution in society, where
certain groups are considerably better off than others. An example, businessmen who earn
higher profits from rising prices will gain from continuous inflation while people who depend
on fixed incomes like pensioners and salaried workers tend to lose from continuous inflation.

(Average Income by Household per year 2013 -2014)

This shows the top of income earners earnt over £100,000 even though, after tax and
benefits, this fell to £73,682. While the poorest of income earners earnt £3,738. After tax
and benefits, this rose to £12,050.

II. Savings

Inflation have depreciated the value of fixed deposits, bonds, life insurance policies
and money in terms of real income. Since inflation depreciates fixed deposit values,
individuals will save less and invest in non-financial sectors. In 2017 a significant fall in the
UK savings ratio to a record low been caused by a fall in real wages. Thus, depreciation in

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Sterling post-Brexit have pushing up cost of living and contributing to fall in real wages, to
maintain spending, consumers have borrowed and dipped into savings.
III. Production

The general level of prices rises so producers will make a higher profit that lead them
to increase their level of production and investment. Thus, will create more job opportunities
and reduce unemployment.

IV. Balance of trade

The United Kingdom's trade balance has been in deficit since 1998 due to trade
deficits in goods which are partially offset by trade surpluses in services. The overall level of
UK trade in goods as a proportion of total trade in goods and services has been declining
gradually since 1986, at a peak of 75% in 1985. This is consistent with the increasing share
of UK trade in services for 35 percent of total trade in 2017.

Exports fell to GBP 47.99 billion, led by a decline in goods shipments and a drop in
services exports. Meantime, imports rise to GBP 49.72 billion, as increase in purchases of
goods partly offset a decline in acquisitions of services. (source: Office for National
Statistics)

2.4 MEASURES TO CONTROL INFLATION

I. Fiscal policy

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 Taxes (such as income tax and VAT) and cutting spending can be achieved by the
government. This improves the budget situation of the government and allows the economy
to reduce demand. Both these policies decrease inflation by reducing aggregate demand
growth. Lowering AD growth will minimize inflationary pressures without triggering a
recession if economic growth is rapid. If a nation had high inflation and negative growth, then
it would be more unpalatable to reduce aggregate demand because reducing inflation would
lead to lower production and higher unemployment. Inflation could still be decreased, but it
would be even more harmful to the economy.

II. Monetary policy

Monetary policy requires the use of interest rates and other monetary instruments to
control consumer spending levels and aggregate demand levels (AD). Monetary policy, in
particular, tries to stabilize the economic cycle, holding inflation low and preventing
recessions.

III. Direct control measures

Government can prefer to impose direct controls on certain prices and salaries, such
as public sector pay awards, the annual increase in government sector pay may be tightly
regulated or even frozen (which means a real wage decrease and regulatory regulation of
the prices of certain services such as water bills, if the price capping regime changes, this
can have a short-term effect on the rate of inflation.

3.0 UNEMPLOYMENT

Unemployment is term refer as labor force participants being available and willing to
work but are unable to find jobs. Though, discouraged workers which refer to an individual
who wants to work but has been unsuccessful for a long period of time in finding a job and
consequently given up on job seeking are not included. Hence, the labor force defined as
people who are above 15 years of age and are actively seeking employment.

3.1 UNEMPLOYMENT IN UNITED KINGDOM

In the United Kingdom, the unemployment rate measures the number of people
actively looking for a job as a percentage of the labour force. Age is an important factor in

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the rate of unemployment. Among those aged between 16 and 24, the unemployment rate
was 11.4% in 2019, while the unemployment rate for older age groups was below the
national average. When youth unemployment is further broken down, those aged 16 to 17
had an even higher unemployment rate than those aged 18 to 24, at 20.5 per cent,
compared to 10.4 per cent. The high rate of youth unemployment can be attributed to the
fact that many people are unemployed.

Thus, for the gender of those that are unemployed, men have consistently had
higher rate of unemployment rate than women since 2000. Between 2000 and 2018,
women have consistently had a lower unemployment rate than men. For example, during
the financial crisis at the end of the last decade, the unemployment rate for women was 7.5
per cent, while for men it was 8.6 per cent. Young people are also much more vulnerable to
unemployment, with rates far higher for those between 16 and 24 years of age than for
older age groups.

The United Kingdom's unemployment rate in the three months leading up to

October 2020 was 4.9%, the highest since July 2016. Prior to the arrival of the Coronavirus
pandemic, the United Kingdom had a relatively low unemployment rate, comparable to the
mid-1970s. During the period provided, unemployment was the highest in the spring of
1984 when it reached 11,9 per cent. Total unemployment in the United Kingdom was
reported to be 3.7372 per cent in 2019, according to the World Bank collection of
development indicators compiled from officially recognized sources.

3.2 ISSUE OF UNEMPLOYMENT

The official unemployment rate in the UK is defined as the percentage of the labour
force listed as unemployed. The denominator is often referred to here as the' Labour Force'
or "Economically Active Population".

There were 33.4 million individuals in the UK workforce and 1.56 million individuals
identified as unemployed in the three months to February 2017. These numbers reported a
4.7% official UK unemployment rate.

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 Since 1971, UK unemployment rates consistent with this definition have been
available. The highest unemployment rate reported since 1971 was 11.9% in 1984, given
this stable time series, and the lowest was 3.4% in late 1973/early 1974.

In the United Kingdom, the unemployment rate climbed to 4.8% in the three months
to September 2020, above 4.5% in the previous period and 3.9% a year ago. In the
aftermath of the coronavirus-hit, this is the fastest jobless rate since the last quarter of 2016.
The figures were in line with predictions. A record number of redundancies (up from 181,000
to 314,000) were also seen from July to September 2020, although the job rate continued to
slip to 75.3%. The total number of hours worked per week was 925 million, down 127.6
million hours from the previous year, but up a record 83.1 million hours from the previous
quarter.

3.3 CAUSES OF UNEMPLOYMENT

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 (UK Unemployment Jan, 1980 – Oct, 2018)

Current UK Unemployment rate

 A 3.9% unemployment rate (17 March 2020) - UK Unemployment at Office of

National Statistics (ONS)
 It was estimated that the United Kingdom unemployment rate was 76.2%
 1,281,000 million unemployed people. (ONS)

Employment rates

 The United Kingdom job rate is calculated at 76.2% (percentage of people aged 16-
64 at work) - ONS
 Employment: 32.801 million employed citizens.

Participation rate

 The rate of inactivity (the percentage of economically inactive citizens aged 16 to 64)
- 20.8% (ONS)

General causes of United Kingdom unemployment

1. Recession. Deficient unemployment allows cyclical demand to arise. With actual

GDP (gross domestic product) falling, firms are producing lesser and, as a result,
there is less demand for workers. In a recession, some firms go out of business,
leading people to lose their jobs.

o Demand deficient unemployment in production happens when the economy is

below full capacity. In a contraction, for instance, overall demand (AD) will
fall, due to a decrease in productivity and negative economic growth.
o With a fall in demand, businesses will employ fewer people because they
produce fewer products. Any firms would also go out of business, resulting in
large-scale redundancies.

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 o In recessions, when firms lay off employees, unemployment continues to
increase rapidly. Deficient unemployment in production happens when the
economy has an inadequate demand to sustain full employment.
2. Structural factors. Due to the fast-changing existence of the economy, there is
structural unemployment. Manufacturing jobs, for instance, have been lost because
the economy has been more concentrated on the service sector. Since they lack the
necessary skills, some unemployed people have found it hard to get jobs in emerging
high-tech industries.

This is due to a shortage of expertise in the labour market that can be triggered by:

 Occupational immobilities. This is related to the difficulties in acquiring new

skills related to new markets and technological change. For instance, in high
tech industries, an unemployed farmer could struggle to find work.
 Geographical immobilities. This applies to the difficulty of finding a job in
moveable areas. There could be jobs in London, for instance, but seeking
suitable housing or schools for their children may be difficult.
 Technological change. If labour-saving equipment is developed in some
sectors, there would be a decrease in demand for some types of labour that
have been replaced by technology.
 Structural change in the economy.

3. Geographical unemployment. Unemployment in certain states and specific areas is

higher (e.g. north). Geographical immobilities are available, making it hard for the
unemployed to move to the south, where there are more job opportunities available.

4. Frictional unemployment. Because of frictional causes, there is still some

unemployment, e.g. it takes longer for the unemployed to find a new job. This
unemployment caused by the time it takes people, such as graduates or people
changing jobs to switch between jobs. Frictional unemployment is also a type of
voluntary unemployment, as they want to wait before a better job is found. This
happens as persons chose to be unemployed rather than taking up available jobs. If
benefits are good, for instance, people may choose to continue on benefits rather
than get jobs.

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 5. Youth Unemployment - for young workers, it is the largest, mostly because they
lack skills or proper motivation.

3.4 EFFECTS OF UNEMPLOYMENT

The general effects of unemployment.

1) Effects on Individuals and Society

One of the most devastating personal experiences in the working-age population

is unemployment that can affect the individuals itself and cause social problems.

 Workers will lose their skills over a long period of unemployment, creating a loss
of human resources due to the decreased production involved.

 Unemployment increases susceptibility to having disease, malnutrition, stress,

low self-esteem, depression, and enhancing the youth’s feelings of externality
and helplessness.

 As unemployment rates rise, crime rates, especially property crime, tend to rise.

 Increases in the unemployment rate tend to increase the suicide rate of the
country. Unemployment is one of the major reasons for people committing
suicide.

2) Effects on the Economy

Unemployment is a condition that can be seen developing in almost every

country. Not only does it affect a person, but it also affects the country's financial
and economic growth.

Increased government borrowing.

 High unemployment will affect the tax revenue to fall because there are fewer people
paying the income tax.

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  More will have to be invested by the government on unemployment and associated
compensation. The government not only provides unemployment benefits, but it
would be more likely to earn housing benefits and income support for a family that
has unemployment.

3.5 MEASURES TO CONTROL UNEMPLOYMENT

During the recession, United Kingdom was able to prevent its unemployment rate from
skyrocketing.

1. Fiscal policy
To influence the rate of economic growth, fiscal policy includes adjusting the level of
taxation and government expenditure.

Increase in government expenditure

As United Kingdom’s government expenditure keep increasing throughout the
year, this will affect the reduction of unemployment rate in the country.

Decrease in taxes
To reduce the employment rate, the government have to reduce the general
burden on the taxation for the community. A reduction in all types of taxes will
increase people's consumption costs. As taxes for business and corporate decrease,
it will promote an increase in investment. Hence, employment will also increase due
to that.

2. Monetary Policy
Monetary policy is also concerned with maintaining an economic growth rate that is
sustainable and with keeping the unemployment rate low.

Lowering discount rate and interest rates

A decline in the discount rate will result in the decline in other interest rates.
Currently, the United Kingdom’s discount and interest rate stated by the Bank of
England are 0.1% respectively. It has been reduced after the pandemic happened in
the country.

Open market operations

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 Through the implementation of monetary policy, Central Banks have several
possibilities that are available with the application of monetary policy, and they have
produced an effective strategy to have support to the financial scheme with liberal
liquidity. They have also worked with the government to mediate and create
employment openings in markets.

3. Direct Control Measures

Direct control measures are taken to reduce the unemployment rate in the country
besides fiscal and monetary policies.

Training and technical education

In a country, more training and technical education should be provided by the
government to help individuals who have difficulties in securing a job. Individuals that
have levelled up their skills and increase their knowledge, they will be able to find
jobs easily.

Development of new land

New land can create more job openings to unemployed individuals, especially
to the rural community areas. The development of new lands will be through
government agencies.

Job creation in various sectors of an economy

The diversity in an economy will increase job opportunities in the country.
When each sector in an economy uses, transportation, finance, insurance and
others, it will increase the job opportunities and reduces the unemployment rate.

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4.0 CONCLUSION

The UK economy was suffering from a downturn because all the statistic still reflects
a frail economy element, especially, negative GDP growth for the consecutive sections.
However, the ball has reached the bottom of the cliff and is bouncing up again. This country
has successfully put a stop to the recession from becoming depression and managed to
recover at a relatively high speed. Whether traditional or digital, the UK economy is tough
and has proven this through many slumps, flops, downturns and economic shifts throughout
history. These facts are just some of the fascinating points of our economy that will confirm
you always have something to talk about whenever needed in conversation. When inflation
is too high of course, it is not god for the economy or individuals. Inflation will always reduce
the value of money, unless interest rates are higher than inflation. Although n theory that
should be good for the economy, by encouraging people to spend rather than save.
Unemployment is a serious issue for any types of economy. It creates negatives affects to
unemployed as they are jobless and suffer from worse prospects to find new job and those
who are employed feel less secure to keep their jobs in future. A deteriorating economy can
be categorized by a variety of reasons. It can be from people, from the government and so
on. But there are various ways that can be deal with the problems.

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5.0 REFERENCES

Bell, D. N. (2009). What Should Be Done About Rising Unemployment in the UK. Scotland:
University of Stirling.

Clasen J. (2000). Unemployment and Unemployment Policies in the UK.

D. Clark. (2020). Tax receipts in the United Kingdom from 2000/01 to 2019/20.
https://www.statista.com/statistics/284298/total-united-kingdom-hmrc-tax-receipts/

Deviga Vengedasalam. (2013). Principles of Economics Third Edition. New York: Oxford
University Press.
Guershon, S. (2020). Bank of England base rate.
https://www.bankrate.com/uk/mortgages/bank-of-england-base-rate/
Pettinger, T. (2020). Savings ratio UK
https://www.economicshelp.org/blog/848/economics/savings-ratio-uk/
Pettinger, T. (2019). Causes of unemployment.
https://www.economicshelp.org/macroeconomics/unemployment/causes/

Pettinger, T. (2016). The distribution of Income and Wealth in UK.

https://www.economicshelp.org/macroeconomics/inequality/distribution_income/
Pissaridēs, C. A. (2003). Unemployment in Britain a European success story. München:
Univ., Center for Economic Studies.

Riley, G. (2020). Fiscal Policy in the UK - Key Facts in 2018: Economics.

https://www.tutor2u.net/economics/reference/uk-key-fiscal-facts-for-2018

UKEssays. (2018). Unemployment Impact on Australia and the UK.

https://www.ukessays.com/essays/economics/unemployment-impact-onaustraliaand-
the-uk.php?vref=1

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