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Chapter 12 Domestic Economy

Chapter 12 Domestic Economy. Focal questions. What are Britain ’ s principal natural resources? (P204) Why is the City of London known as the world ’ s leading international financial centre?(P204, Slides14-21)

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Chapter 12 Domestic Economy

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  1. Chapter 12 Domestic Economy

  2. Focal questions • What are Britain’s principal natural resources? (P204) • Why is the City of London known as the world’s leading international financial centre?(P204, Slides14-21) • Why do you think there have been different attitudes towards nationalisation and privatisation in Britain’s economy since the end of the Second World War? (PP206-7) • How do you understand the relationship between the British Government and Britain’s economy? (PP207-8) • How are consumers protected in the United Kingdom? (P210)

  3. A1 Introduction • ‘mixed economy’ • Privately owned (most) and state owned (major services such as health) enterprises • Government involvement: social welfare policies; laws to regulate industrial relations • Nationalisation & privatisation

  4. A 4 The Mixed Economy cont • Nationalization • the acquisition of private companies by the public sector • Privatization • the return of state enterprises to private ownership and control

  5. Nationalisation & privatisation (P206) • Why nationalise? • The public interest • Not profit-oriented • Government-appointed directors & government involvement in long-term policy • Autonomous management of daily affairs

  6. By the end of the 1970s Margaret Thatcher Primary objective: to beat inflation “ In politics if you want anything said, ask a man. If you want anything done, ask a woman”

  7. Nationalisation & privatisation • Why privatise? • Efficiency • Profit-oriented • Decreasing government involvement • The free market: consumers, goods, services, prices, manufacturers, providers of services

  8. Inefficiency of nationalised industries • “Proxy-owners” in state-owned industries: politicians; affecting commercial decisions • Nationalized industries: no need to succeed; dependence on government, not market: no incentive

  9. Inefficiency of nationalised industries • Failure to harness self-interest • Incurment of losses on a grand scale—tax raise: 83% top rate on earned income, 93%, savings income

  10. Privatisation—advantages • Efficiency: lower prices, better services • Participation of ordinary people • Access to private capital markets • Less government intervention, less political pressure • More sources of capital • Competition: incentive for better performance of state-owned industries

  11. Privatisation—disadvantages • Good management of nationalised industries: no need of privatisation (theoretically?) • Labor relations: interest of workers • Co-ownership: worker-shareholders—how much do they weigh?

  12. Economic sectors • The Service industries (health care, hospitality, real estate and food chains) • Financial services (banking and insurance): big revenue earner; London: overseas branches of financial organizations • Industries: a steady decline since the 1960s; 20% • Agriculture: 60% of the total food demands of the nation • The Oil, coal and natural gas reserves: considerably high; 10% of the national GDP

  13. A 2 Natural Resources & Infrastructures (P204) • Highly developed & efficient main road and rail network and airports-- excellent infrastructure pp 203-204 • Natural resources • Principal resources at present -- oil and gas in the North Sea, on the coast of Scotland • Large amount of coal, but has been kept for future use • Manufacturing: still important • Services, industries such as chemicals, electronics, etc: important & successful

  14. A 3 Finance • The financial institutions • Banks • Building society • Insurance companies • Stock exchange

  15. The Bank of England • Nationalised; operated on behalf of the government • Controls the currency; sets interest rate; acts as banker both to the government and to the commercial banks • Monetary policy and financial policy • Integrity and value of the currency, stability of the financial system; the effectiveness of the financial services sector

  16. London: March 2002 296 branches and subsidiaries of foreign banks 1/3: from the Euro area Foreign banks: 50%+ of UK banking sector assets, £3,500+bn The UK banking sector: cross border bank lending - 19% of the world total BANKING A 3 Finance

  17. Largest in Europe Third largest in the world Net premium income of £157bn Main skill centre for world insurance business Global market leader in aviation and marine insurance; combined market share: 23% A 3 Finance • Insurance: 2001

  18. FOREIGN EXCHANGE April 2001 Largest in the world Daily turnover: of $504bn, 31% of global turnover ＞ New York + Tokyo A 3 Finance

  19. UK: World's largest fund management centre $2,460bn of institutional equity holdings in 1999 Assets managed on behalf of domestic and overseas clients： £2,800+bn in 2000 London: leader in the management of overseas clients non-domestic portfolios FUND MANAGEMRNT A 3 Finance

  20. SECURITIES DEALING Number of foreign companies listed on the London Stock Exchange: second (No.1: NY) In the first eight months of 2002, turnover in these companies booked in London: 56% of all trading in foreign companies around the world Turnover in Euro-area stocks: 2/3 of all foreign equity trades booked in London London: major centre for the international bond market A 3 Finance

  21. Regional Household Income Comparison 2006

  22. Beneficial ownership of UK shares: end 2006

  23. Private Enterprise • The single proprietorship • Easy to set up • Owner: full control • limited amount of capital -- small businesses • All the legal and financial responsibilities

  24. Private Enterprise • Partnerships • Larger amount of capital; bigger • Each partner: legally liable for all the debts of the firm, even if incurred by the activity of another partner Such businesses can raise larger

  25. Private Enterprise • Co-operatives • Mainly in the retail trade • Their customers who pay a minimum deposit on a share in the business • Vulnerable in the face of the intense competition Such businesses operate mainly

  26. Private Enterprise • Joint stock companies • Large amounts of capital • Transfer of ownership: easy (shareholders selling shares to anyone else) • Risk: Some unscrupulous company promoters may fraudulently try to raise funds for their own ends from the public. (Source: An Introduction to the UK Economy by Harbury and Lipsey )

  27. Limited Liability • Limited Liability • An investor’s liability to debt is limited to the extent of their shareholding • 100 £1 shares: bankruptcy—greatest loss, £100

  28. A 5 The Role of the Government • Growing government influence (P207) • The two World Wars: the proportion of income from economic activity devoted to government expenditure -- sudden increases • Dropping after each war: 46% in 1981 & 1982, 38% in 1983, a slight rise in the early 1990s (economic downturn), 39% in 1998 • To reduce the share of public expenditure of GDP

  29. Taxation & Government Expenditure • Where does the government get its money from? • Stock exchange • Taxation -- Direct and Indirect Taxes • Direct taxes –national insurance contributions, income tax (a ‘progressive taxation system), corporation tax (paid by companies) • http://www.statistics.gov.uk/CCI/nscl.asp?ID=7363

  30. Taxation & Government Expenditure • Indirect taxes: (P208) • VAT (VAT was introduced following Britain’s membership of the EEC: a percentage of the money raised is contributed to the European Union budget.) • Duties on alcohol, tobacco, petrol, etc.

  31. A 6 Consumer“Student’s expenditure” (P 210) • Around half of the expenditure: “essential items” • Eg. accommodation, food, bills and household goods and course expenditure • A larger contribution to tuition: course expenditure -- a higher percentage (the government) • Students who lived at home with their parents vs students living independently: a quarter of the amount on housing

  32. Outlook for the UK Economy • Treacherous times ahead • Profit warnings remain high. • Companies stop short. • Household goods, home construction, general retailers, personal goods, etc affected • The credit crunch

  33. Real GDP quarterly growth

  34. http://www.economywatch.com/world_economy/united-kingdom/ • http://www.statistics.gov.uk/cci/nugget.asp?id=1552 • http://www.statistics.gov.uk/cci/nugget.asp?id=107 • http://www.statistics.gov.uk/CCI/nugget.asp?ID=192&Pos=6&ColRank=1&Rank=144 • http://economicsguide.blogspot.com/

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