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Analysis of UK economic prospects in 2015-2016:
As in the given situation the consumer spending growth which can be defined as the purchasing power of customer is more than the gross domestic profit (GDP) of the country. This is a sign of very low inflation rate in the economy. This is an effect of fall in the oil prices, which tends to increase in the real earnings by reducing the cost of production. Oil is the key factor of every activity and every industry and treated as indirect cost or fixed cost for the calculation of COP. Decrease in the oil prices can be taken as the reduction in tax rates. And increase the purchasing power of consumers (BUSINESS, 2011).
The economy of UK is the fifth largest national economy on the basis of GDP. And on the basis of purchasing power parity (PPP), which denotes the spending power of consumers, is the ninth largest economy in the world. The UK economy is one of the highest contributed economies in globalization, liberalization and privatization as in it has huge percent of foreign direct investments (FDI). The country was gone through the recession in last several years and started to recover in few years back. So the growth rate was low in the year 2014 for the business investments. The GDP of the country is increasing from the year 2014 as the results in the increase in the rate of employment, real earnings growth, productivity of whole economy and consumer spending. There is a decrease in the rates of the consumer price index (CPI), prices of material and fuel, inflation rate, interest rates, mortgage rates. This tends to increase the investments domestic and worldwide. The economy of UK is recovering by balancing and repaying its debts and increasing its revenues (Lario de Oñate, 2011).
As there is growth in the economy of UK still the corporates are worried about the uncertainties in the market worldwide. The economy of china is the second largest economy in the world, so it has a great impact on other economies worldwide. The fall in the stock prices and prices of commodities affect the growth rate of business investments and the UK economy. The government of UK decreased the rate of corporate tax in the budget 2015. Earlier it was 20% and in budget in July it was decreased by 2 %. This is a policy of UK government to increases its growth in corporates and enhances the economy of country by attracting the foreign investors. Reduction in corporate tax helps to increase exports in country. Because the cost is less and return is high. Foreign exchange becomes more effective (Lario de Oñate, 2011).
Every countries economy has consumer’s spending as a part of the GDP. Consumer spending or household is defined as a part of consumers played in the growth of the economy. Government collects its revenues from consumers as tax charges on the goods produced or services provided by them. The all over revenue generation of government of a country is from consumers. If the consumer spending decreases the impact will be on the spending done by government. Financial institutions also depend on the consumers for the lending of the money. Decrease in the consumer spending can affect every sector, which leads to recession in the economy (Lario de Oñate, 2011). The international risk or uncertainty is increased because of the “Brexit”. UK is planning to leave the European Union because it has its most of the businesses in Britain. The impact of this exit from EU will be on the economy of UK as in there are uncertainties of the growth of business. Relationship with the EU will be affected and the negotiation will be difficult for the deals. The trade policies will be altered and the flow of funds will be affected as in the number of foreign investors will be decreased. Domestic deals will be the source of the economic growth. The emerging uncertainty will work as a hurdle to attract the investors and the importers (Lario de Oñate, 2011).
Hedging is investment method to abstract profits from opportunities and reduce the chances of losses. In the given case study many perspectives are given of UK government in which the growth rate is increasing of business environment, but there are some uncertainties are emerging in international marketing which can affect the economy. The country is planning to exit the EU and the foreign direct investments will be affected because the country has to negotiate with new deals and investments. But there are good chances of recoup of the investments based on the trade policies of the country. So the investors are trying to take benefit of hedging. The country contributes a huge amount of money in the membership of EU that money can be invested further by the government. The consumer spending is also high of the country; the reason can be fall in the prices of oil which can be treated as cut in tax rates. Corporate tax is also reduced by the government to give a growth to the business investments (Buckley, 2014).
The economy of UK is recovering from the last few years. The GDP is growing every year but in the year 2015-2015 growth in consumer spending is more than GDP gDP is calculated as the total of investments, government spending, net exports and consumer spending. In the given situation the GDP are boosted by the decrease in the oil prices. Decrease in the oil price can be stated as the reduction in tax rates and the increase in the consumer price index (CPI). It also reduces the cost of production and increase the productivityThis leads to depict in the inflation rate. Inflation rate defines as percentage decrease in the value of money. Oil prices and inflation have direct relationship (McCann, 2011).
The fall in price of oil reduce the inflation, this is a short term approach. cost is reduces by fallen price of oil and profitability increases. The decreased price of oil leads to surplus of supply over demand. And also affect the refineries of oil which are bearing a high cost of production as they use expensive machinery and equipment. But the market price of one barrel oil will be less than the cost. This will shut down the producer’s plants. And slowly there will be shortage of supply (McCann, 2011).
The economy of UK is recovering from the last few years. The GDP is growing every year but in the year 2015-2016 growth in consumer spending is more than GDP. GDP is calculated as the total of investments, government spending, net exports and consumer spending. In the given situation the GDP is boosted by the decrease in the oil prices. Decrease in the oil price can be stated as the reduction in tax rates and the increase in the consumer price index (CPI). It also reduces the cost of production and increase the productivity. This leads to decrease in the inflation rate. Inflation rate defines as percentage decrease in the value of money. Oil prices and inflation have direct relationship (McCann, 2011).
The fall in price of oil reduce the inflation, this is a short term approach. Although cost is reduces by fallen price of oil and profitability increases. But this effect is for short term and has a bad impact in the coming years. The decreased price of oil leads to surplus of supply over demand. And also affect the refineries of oil which are bearing a high cost of production as they use expensive machinery and equipment. But the market price of one barrel oil will be less than the cost. This will shut down the producer’s plants. And slowly there will be shortage of supply (McCann, 2011).
So we can state that the fall in oil price reduce inflation by growing consumer spending. But there are also some other theories which are countering on the direct relationship of oil price and inflation. As a conclusion we can say that there is a short term effect of the oil price on inflation rate but there are some examples of years in which the oil price did not affected inflation (McCann, 2011).
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McCann, P. 2011, "International business and economic geography: knowledge, time and transactions costs", Journal of Economic Geography,vol. 11, no. 2, pp. 309-317.
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