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The Microeconomic Foresights and Its Principal Aims Analytical Essay


Introduction

Macroeconomics is the study of inflation, unemployment, business cycles, and the growth in the economy substantially from its entirety to the bits. Its focus is on the cumulative relations and appending that analysis with the microeconomic foresights (Colander, 1993: 6).

Macroeconomics has four principal aims; to ensure complete employment, achieve equilibrium when it comes to balance of payments, positive economic growth and a stable decline in price changes. We seek to analyse these.

GDP

Gross Domestic Product (GDP) is the complete worth of goods and services generated within a given jurisdiction in a year (Begg et al, 2005). It eliminates financial transactions and payment transfers. It takes into account the incomes and outputs of an economy.

Its representation is done in comparison to the previous quarter or year. Its changes have an effect on the stock market (Maysami, Lee and Hamzah, 2005: 54). It is used to determine whether the economy of a country is in recession. Some economists believe that GDP is determined in three ways;

  • As output: this is the outcome of what is put in. It can be estimated from all sectors of the economy such as production and service sectors (The Telegraph, 2012).
  • As expenditure: this is the worth of what is obtained by various sectors, to achieve their desired results. This is done by both the government and the private sectors. Its calculation is done by totalling what has been used, investments, what the government has expended and the net exports (BBC News Business, 2012).
  • As income: this is the result of what comes in after every output and expenditures have been executed to produce profits, salaries and wages. It’s calculated by totalling employees’ compensations, gross profits for all organizations plus taxations minus subsidies (Kumar David and Wen, 2001).

GDP is measured as:

  1. Nominal GDP; this is the worth of the wealth of a nation. It is measured in terms of the present cash terms.
  2. Real GDP; this is the worth of the amount of production of a nation. It takes into account the actual terms of the transaction.
  3. Measuring real economic growth; this is done in two steps. First, work out the difference in nominal GDP. Then divide by a cost indicator, to correct for price changes.

It should be measured quarterly. This is because; it is the main means of knowing the economic progress. The government’s treasury uses it to plan and set economic policies (Sloman et al, 2010). Secondly, it is used by the Bank of England and the Monetary Policy Committee of the same bank to establish rates of interest.

It is also used by the European Union, to determine how various countries would contribute towards its budget. Additionally, the UK’s GDP is adopted by various organizations such as International Monetary Fund and the World Bank, to gauge several other countries’ economies (Marcellino, 2004).

A trade-off for targeting GDP is that increased real GDP causes businesses to employ more people resulting in a decrease in unemployment.

Reduced real GDP gets businesses to employ fewer workers causing a rise in unemployment. Keeping the rate of inflation too stable; leads to larger fluctuations in real GDP (UK National Statistics, 2012).

Inflation

This is the continual increase in prices over a period (Riley, 2006). According to economists, a normal rate of inflation should be between 2-3 %. It is attributed to availability of a lot of cash in distribution and yet the rates of interest go down.

Inflation is measured using Consumer Price Index (CPI) and the Retail Prices Index (RPI). These investigate the changes in prices of trivial commodities and services such as bread, tickets, etc. consumed over a period. These changes are recorded in percentages. This is the product’s or service’s CPI.

The difference between CPI and RPI is that CPI considers the prices the consumers purchase the products at, depending with how the prices of these goods change in the market. For example, as the prices increase, some consumers will go for the lower priced alternatives and ignore high prices.

Overall, the result is a lower CPI. Moreover, RPI includes prices of houses and land rates and every payment made to the council such as mortgages and taxes. It is used by economic researchers to tell the prices of the various items consumed regularly.

Furthermore, these prices are used by the government and other stakeholders, to set economic policies. It impacts on the overall interest rates and mortgages paid. A prospective inflation leads to an increase in interest rates. This is done to prevent any financial shortfalls in the future.

It also influences the amount of pensions and benefits of the state and affects other people’s income (Healy, 2003). Inflation is estimated to continue soaring high especially due to the high prices of fuel and electricity.

There exists a trade-off between growth and inflation. Targeting low inflation may lead to the need for greater rates of interest and taxes. Therefore, such a target would result in trade off of a lower growth of the economy. Thus, economic projections should be done to prevent a flop in the economy (Bank of England, 2012).

The trade-off between inflation and unemployment is measured using the Philips Curve. This trade-off is realized in the short term. When the economy nears full employment, a rise in inflation occurs. Inflation leads to rise in interest rates. This thus reduces consumer spending and decreases demand. It in turn, will lead to lower inflation.

Unemployment

This is the status of the economy indicated by the people who are seriously looking for paid work but yet do not get the opportunity to be hired. There are two views of unemployment: voluntary; one declines a job due to the salary rates and involuntary; one does not have a chance at any employment opportunity.

It is termed as a hold up pointer since businesses will always impede dismissing people as much as they can in hard times (Begg et al, 2005).

There are three types of unemployment; frictional: workers who stand at a fence as far as jobs are concerned, structural: caused by constraints in the market such as lack of skills or experience and finally cyclical: when need exceeds provision. The gap widens and with time, the unemployed increase in number.

The UK was hit by its greatest recession in a long time in the year 2008. As a result, the rate of unemployment rose to 8%. The speed for recovery has not been that fast since then. After this, as the year progressed, the rate fell notably into 2012.

Since then, the figure of people gaining employment keeps rising especially in the privately owned firms. This could also be because more opportunities are being formed with the creation of new jobs as opposed to when there are no jobs.

Unemployment is measured using the International Labour Organization methods. Surveys are carried out by the Office for National Statistics. They conduct their surveys monthly but do comparisons after every three months. They do head counts based on the employment status of individuals.

They also document complaints by people who are unemployed against the receivership of their allowance or those who receive such amounts since there is unemployment allowance. This is computed as shown (BBC News Business, 2012).

Unemployment rate %= Number of those who claim the jobseeker’s allowance, against those who are employed together with the claimants’ number multiplied by 100%. This is dealt with by the Department for Work and Pensions.

However, these figures may at times never reflect the true state of unemployment since not many people claim their Jobseeker’s Allowance (JSA). Those are the two means to conduct such measurements.

One of the latest surveys shows that the unemployment rate has declined in the UK by a significant amount. This was statistically 0.4% drop from prediction of 8.7% to 8.3%. The employment rate currently stands at 71.2% (Autumn Statement, 2012).

The government should manage unemployment. This is because they need to control inflation. More unemployment rates lead to a decrease in demand for goods due to reduced purchasing power. Inflationary growth soars higher and stability in the economy reduce. This will affect the growth of the economy.

Balance of Payment

These are the records of exchanges of monetary value that occur among the users of products, various businesses and their respective government within one state with other external users (Riley, 2012). Striking a balance is one of the key aims of macroeconomics. It is divided into two sections; current accounts and the capital and financial account.

Current account is subdivided into trade in goods; importation and exportation of finished goods such as manufactured items like cars, energy products, and raw materials and partially finished goods like tea and parts of other items.

Secondly, trade in services; services such as tourism, transport, and banking. Thirdly, investment income; this includes profits from businesses abroad and any other transactions carried out overseas. Finally, transfers; this refers to the movement of items from one country to another such as items for charity (Slomane et al, 2010).

Capital and financial accounts include flows between the UK and the entire globe i.e. real foreign direct investment. In this, the foreign owners of the firm overseas have some control of the business. Another is portfolio investment; the owner only has shares but lacks the direct control of the overseas firm.

The third aspect is financial derivatives; this refers to the monetary instrument that relies on another for its value i.e. currencies of a foreign nature. Finally, reserve assets; overseas monetary assets controlled by finance authorities such as the Bank of England.

They can be assets like rights. These two accounts are essentially supposed to yield equal and ‘opposite’ results (BBC News Business, 2012).

It is used to determine the amount of money expended in importing products and services against the exports of that country. In the short term, balance of payment significantly boosts the economy of a country.

This is because consumers have a lot of options when it comes to purchases. This, therefore, improves the living standards of a country. However, it derails the economy of a country in the long run (Begg et al, 2005).

Management of balance of payment comes in handy when dealing with imports and exports. This is because if the UK imports more than it does export, then they will realize a decline in the current accounts.

It creates a lack of equilibrium in this account. A negative balance of payment means that a lot of cash is going out as opposed to flowing into the country. This reflects badly on the economy of the country.

The trade-off between balance of trade and economic growth is that high growth rates in the economy come about as a result of high deficits in the current account. It, therefore, implies that a fast paced growth rate negatively affects the current account. This affects the costs of importation if the demand and prices are high.

Conclusion on Macroeconomics

All four aspects of macroeconomics have an impact on the overall economy of that country. That calls for their proper integration to yield positive results. The GDP is profoundly impacting the face of employment or lack thereof.

Therefore, it should be the goal of every government and its various stakeholders to take into consideration the continual growth of the economy. This will overall mean less unemployment rates and more productivity. The rate of inflation in the UK for instance is expected to stay high by some economists.

The rate of interests, therefore, should be looked into to avoid hurting the ordinary person’s pocket. This is because as explained earlier, the interest rates increase with the anticipated rise in inflation (BBC News Business, 2012).

In the Autumn Statement, the main strategies that would have to be laid down to ensure economic stability would be to shield the economy from pilferage ensure its growth and practice economic fairness. Balance of payments, if properly managed can be a countries’ financial reservoir.

Introduction to the Energy Industry

The energy industry is comprised of three sectors; dual fuel, electricity and gas. Historically, the UK was the first to see the light as the initial invention of electricity was done there. The indicators for electricity supply are namely; the costs estimates and assumptions.

Moreover, the leading firms are expected by Ofgem, to provide a public report regarding Consolidated Segmental Statements. This gives individual incomes, costs and profits accrued in terms of the generation of both household use and industrial use electricity.

It can also be done through calculations of the rolling average net margin. There are also assessments conducted by the government which can be used, as well.

Apart from the companies that supply electricity, the UK also has a support mechanism known as renewable obligation. This supports the renewable electricity generation (BBC News Business, 2012).

It was introduced in the year 2002 in England, Wales and Scotland, and 2005 in the Northern Ireland. Their aim is to compel the suppliers of electricity to sources renewable sources of energy as alternatives. An example is solar and winds power.

The electricity industry is majorly owned by the government, but some of it is also privatized. Reforms that were made in England and Wales in the 1990’s resulted in the formation of various bodies, which governed electricity supply and distribution in the UK.

The New Electricity Trading Arrangements (NETA) was formed in the year 2001 as part of the changes regarding electricity trade. They were charged with the duty of efficacy and creativity. This would provide greater opportunities for the market interested in power deals (European Central Bank, 2012).

It would also still offer secure and reliable supply of electricity. The grid lines of Scotland, Northern Ireland, England and Wales were separated from each. However, after March 2005, they were brought together. This was as a result of the energy Act of 2004 that gave the British Electricity Trading and Transmission Arrangement (BETTA) mandate to operate.

The United Kingdoms’ Electricity Industry

The market structure of electricity of the UK will be described by the following process. It is crucial to delve into the history of electricity in the UK to help us understand the current issues as far as this industry is concerned.

Historically, the electricity Act that was instituted in the year 1957 led to the formation of two bodies; Central Electricity Generating Board (CEGB) and the Electricity Council (Galor and Zeira, 1993: 54).

The role of CEGB was to provide the vast amount of electricity that was to supply England and Wales. It also handled transmission systems within France and Scotland. The electricity Council provided power for England and Wales’s interested parties (BBC News Business, 2012).

In the year 1990, the greater electricity industry was privatized. According to Margaret Thatcher then, their goal was to allow more people to run the industry thereby making power readily available. They thought that this would lead to reduction in prices too. However, as time progressed, this was not to happen.

Most of power was sold out to investors such as the Germans and Koreans. These people assumed a monopoly of power supply, which made the British small shareholders without a voice to contribute to the overall matters (Barrows & Naka, 1994: 121).

One of the companies that emerged after this process of privatization was the National Grid. It is a company that provides electricity and gas in the United Kingdom. Moreover, it supplies power to homes in the northern United States.

It is a mighty power company that is owned by twelve electricity generating and distributing companies from the UK region. It is in the FTSE 100 and last year acquired revenue of over fourteen billion pounds. It was listed in the London stock exchange in the year 1995 (Wongbangpo and Sharma, 2002: 470).

The firm that regulates electricity supply and distribution to the various grid lines is known as Ofgem. It came up with a proposal highlighting various reforms as far as the supply of electricity to consumers is concerned. Through this, it aims at getting the suppliers to announce to consumers the cheaper tariff charges.

They believe that this would give consumers a choice. They also want these companies to display what they have available to the consumers so that they can make decisions without being coerced. They want them to understand the power bills without posing a lot of complications.

According to Downing Street, coming up with new legislation will provide customers with cheaper power deals. The rise in energy is catapulted by three issues; a need to decrease emission of carbon; need to invest in infrastructure and the upward scale of wholesale energy prices (Banerjee, Marcellino and Masten, 2009).

The increases in prices of energy are inevitable though especially in Scotland (Asprem, 1989: 600). This is attributed to the high costs of transportation and the energy efficacy programmes. However according to Adam Scorer, many consumers know nothing much concerning the energy price regulations.

It is, therefore, difficult for them to understand the issue of demand versus supply and, therefore, more often than not lay their blames on the supply companies. This portrays these respective companies in a villainous light especially if the action stems from an array of power supplying firms (von der Fehr and Harbord, 1993: 542).

Adam reiterates that there is a lot at stake right now in the energy sector. This is because the whole sale prices of power are getting higher, in the process companies need to make profits and yet still battle the fact that they need to maintain their reputation especially in the face of clients (Financial Times, 2012).

The electricity market structure in the UK is majorly monopolistic. Monopolies do exist especially in the utilities market such as that of electricity. The National Grid controls the distribution and use of power in the UK and that makes it monopolistic in nature.

Feasibility and Risks of a Cartel

A cartel is an official agreement among companies that are competing to supply similar products. A cartel can also be defined as an international trust which is instituted to control prices and output in a business sector.

It is clear that a cartel is possible in the energy industry. With the privatization that was let out, this provided a leeway for these companies to do whatever they want since they have everything at their disposal.

The advantage of a cartel can be said to be the reduction in prices of electricity supply. It also provides a good outlook to an extent, since it is not restricted to jurisdiction. Furthermore, it gives more and wider markets penetration (Sloman, Hinde and Garrett, 2010).

However, there are quite a number of risks involved in having cartels. One of them is restrictions. Most of these cartels gain monopoly of the power supply and, therefore, pose several restrictions to creativity and imagination. They tend to bar people from accessing a lot of information and the scarce that is made available does not help the people.

According to the proposal that was made by the Prime Minister David Cameron concerning Ofgem having to make electricity companies display their tariffs to the people, the availability of a cartel would easily thwart this progress. This, therefore, would be detrimental to progress and development in general.

Cartels also reduce competition since they tend to prevent any would be electricity companies. This does not provide variety, and as a result, it is the consumer who would suffer.

Because of this, they can decide to hike electricity prices whenever they feel like since they have no one to question them. Most cartels with carefully laid down plans, can last a long, time and can be immensely successful. The pitfalls, however, occur when the parties lose trust of each other.

Conclusion on the Energy Industry

The UK’s energy industry aims to provide its customers with honest, clear and fair services that cater to their power needs. The proposal’s objective is partly to have also these firms let consumers know the means of payment; if it would be through cash, or use of credit or debit cards or through paying in advance (Baumol, 1967: 60).

This is only possible if the market is opened out to many players thereby allowing for competition. This would in turn ensure better services and cheaper tariffs to the consumers. Through such means, customers will have a wider variety to choose from making them be at liberty, and this ensures customer satisfaction.

The consumers themselves want to drive the energy sector and this proposal would give them a clear head start to do so. According to Pfeifer and Pickard, a great number of consumer groups warmly welcomed these reforms arguing that it ‘would put the consumer back in the energy driving seat’ (Sims, 1980: 45).

References

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