The State Of The UK Economy And Its Effects On Honda
Every country will have their own economy which has features that can be measured in different ways to see how they are changing. The economic environment of a country has significant effect on its businesses, as the trade that his happening between that country and other countries affect how much money is passing in and out of the country. This then affects the cost of goods and prices.
Honda, a Japanese car maker has invested £267m into its Swindon plant based in the UK. The plant is to produce 183,000 cars the first year with the output forecast to rise to 250,000 within three years. About 500 workers have been recruited for this totalling the workforce to 3,500.
When economists make judgements about then economy, they use a number of different indicator to measure how the country compared it another point in time for example, the previous month/year. They also use indicators so they can make judgements about the UK economy compared to other economies around the world. The business cycle shows how we can expect to see increases and falls in the production, income and expenditure of the country over a period of time. Economists use specific terms to describe different parts of the business cycle (Growth, Boom, Slowdown, Recession, and Recovery/Growth).
The UK economy moves between boom and recession over time because during a boom the demand for products eventually gets so high that manufacturers and other suppliers cannot satisfy it. This leads to rising prices. As costs rise, including those paid to employees for wages, as most people will be employed the result is rising inflation. People may also borrow more, so the demand for credit also goes up and becomes more expensive. Honda is going through a boom period right now as they have the money to invest and as they also employed 500 more members to work at their plant. This means the demand for their cars was high as they had to employee more people.
Eventually with so many costs increasing, the price of products or services becomes so high that demand starts to fall as people are unable to pay for them. This will then lead to productivity falling as businesses do not need to make as many products or offer as many services and start to cut costs. They may at this point start to reduce selling prices to try to increase demand. Profits also start to fall. Then unemployment starts to go up and the government has to spend more money on benefits and methods of creating a demand for products or services to try to prevent unemployment levels from getting higher. If costs in Honda or other business go up then people will not be able to pay for the cars as they will not have enough money which will result in the business to cut costs such as losing employees.
Once an economy has reached recession, it can be difficult for it to get out of because of the cycle of the recession itself. The most usual way for an economy to be stimulated to recover from recession is by some form of external stimulus, perhaps from the government or another investor. If Honda was to get in recession, it would be very hard for them to get out of it as they are a big business and will have to most likely find external investors to invest in the business.
Knowing the different stages of the business cycle is very important in understanding how the economy is measured. There are five different indicators of an economy’s status which can be measured to indicate how well it is doing. These are:
1. Changes in Gross Domestic Product (GDP)
2. Rates of inflation and deflation
3. Employment Rates
4. Trade Surpluses/Deficits
5. Balance of payments.
Changes in Gross Domestic Product (GDP)
The indicator that is used to measure how much is being made in the UK is known as the Gross Domestic Product. Changes in the GDP indicate which stage of the business cycle the UK economy is in. GDP is the measure of business activity in the country as a whole for a particular quarter. Although it is only shown as one measure there are in fact three parts to it.
* GDP output measures the value of the products and services that have been created through the economy, for example, through farming or manufacturing.
* GDP income measures the total income generated by the production of goods and services in the economy.
* GDP expenditure measures the total expenditure on all finished goods and services that have been product in the UK economy.
The combination of these three different measures is used by the government to work out what is happening to the economy as a whole. This information can then be used to make plans. The office for nation statistics produces economic data and it is published to organisations including banks, industry leaders and the media. GDP statistics are used not only to record what has happened already, but also to predict what is going to happen in the future. GDP has been put in place to find out what is going to happen to a business such as Honda in the future, this can be predicted by using things like output measures, income measures and expenditure measures so they can work out what is going on in the economy. Using this information Honda could also make plans for the future such as reducing/increasing production.
Rates of Inflation and Deflation
Inflation and deflation relate to the measurement of prices in the UK economy. Inflation is measured by the consumer price index (CPI), which looks at prices in the economy as a whole using standard measurements that have been agreed across Europe. The retail price index (RPI) was traditionally used to measure inflation before the charge over to the CPI and includes mortgage interest payments, unlike the CPI.
The CPI index measures the average price changes of a ‘basket of goods’ over a period of time. The price of the basket of goods is measured each month and the Office for National Statistics uses the new prices to work out how much the goods have changed in price. Inflation is when the prices have gone up and deflation is when the prices have gone down.
When inflation is going up it will affect Honda and their prices will go up. This will lead to consumers not being able to buy them which will lead to the business start cutting costs. This will eventually lead to unemployment which will make employees ask for a raise in pay. If a pay increase is not equal to inflation, it means that the employees are being paid less, but if they have a pay increase that is equal to or higher than inflation, this can lead to higher costs for the business, which in turn leads to prices having to go up. Everything has a knock-on effect. When business costs go up because the product is in short supply, for example, when the economy is in a boom, this is known as demand-pull inflation.
As inflation is a measure of prices going up, it is usual that inflation is a positive increase, as costs usually go up rather than going down due to the value of money. Ten years ago prices of items would have been much cheaper than today and since wages have gone up too, people can still afford them.
Deflation is when the price of goods and services reduce for a period of time. This often shows that the economy is in a period of recession.
Although falling prices may seem like a very good thing, it can cause problems. Because prices are pushed down, the cost for a business like Honda needs to be reduced so that they can survive. This means that Honda may need to cut costs and become more efficient, which can lead to redundancies. Deflation also means that people may put off buying the more expensive cars from Honda because they believe that their prices will reduce in the future. This can make it difficult for the business to survive.
Employment rates are also indicators of the performance of the economy, during a boom, employment levels will be high and during recession they will reduce. These employment rates affect a business and the economy as a whole in several different ways.
When the employment levels are high, it may be more difficult for Honda to recruit suitable staff. This is because there may not be many suitable people looking for work. Those already working for Honda may ask for a higher wage as a result of levels of inflation. This may make it difficult for the business to manage costs. However when employment levels are high, the government will receive more money in taxes from those who are working and paying tax and National Insurance.
Another indicator that shows how the UK economy is doing is the measurement of trade surpluses or trade deficits with other countries. A trade surplus means that the value of exports from the UK is greater than the value of imports. A trade deficit means that the value of exports from the UK is less than the value of imports.
When trade deficit occurs, it means that a country is importing more than it exports. In simple terms it means that the country is spending more than it is earning. However, trade deficit is not always a major problem as the country may be able to make up the difference with investment from investors in other countries. The UK has had a trade deficit for a number of years and throughout 2009 the size of the deficit increased. This means that if Honda is Importing more than they’ve exported they will start to lose money because they are not fully covering their costs.
Balance of Payments
The balance of payments is the difference between the amounts of money that is coming into the country against the amount of money that are going out. The balance of payments includes all the financial imports and exports, including those that are trade as well as investments. Like a trade deficit, a negative balance of payments indicates that more money is flowing out of the country than is flowing into the country. Honda has received 267m from Japan to build a plant in the UK, Swindon. The 267m would be used for costs related to the business such as Insurance, Construction, Communications and Transportation.
When people look at the economy as a whole, they often refer to its structure. This means the overall make-up of the economy. The structure is divided into three sectors:
* Primary Sector, which consists of activities that directly relate to nature resources, including farming, mining, oil extraction and fishing
* Secondary Sector, which consists of activities that include manufacturing and construction.
* Tertiary Sector, which consists of activities that relate to services, such as banking, education, communication, hotels, catering and transport.
The new Honda plant would in the Secondary Sector as they manufacture the cars for the dealerships that will be selling them.
During economically challenging times Honda needs to cut costs and offer more services or product more goods in order to be competitive. This means that the economic environment affects the way that businesses operate. Employees who are working make tax and national insurance payments from their earnings and these are used to fund public services, such as hospitals and schools. Honda also makes contributions on behalf of their employees, which include payments towards a pension scheme. The money taken from Honda Employees not only goes towards paying for public services, but also funds benefits for those people who are unemployed, unable to work or retired.