The Business Economic Environment Of The Uk Economics Essay

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A business Environment is a set of Political, Economic, Social and Technological (PEST) factors that are not in a control and influence of the Businesses but has all sorts of Impact on them (Kotelnikov). Business environment is classified into three major categories; Internal Environment, Operational environment and the external environment. The Internal and the operational environment are created by the enterprise itself (Kotelnikov).

Now referring to one of the most important external factors that is The Economic dimension of Environment in a business (Rajput Brotherhood). It refers to the aggregate of the nature of the economic system of a country, structured and the detailed analysis of the economy to economic policies of the government, the organization of the capitalist market, the nature of the factor's best utilization, business cycles, the socio-economic infrastructure etc (Kotelnikov). A successful Entrepreneur Visualizes all those external factors that directly affect the business and rectify its market situation and tries to Increase the productivity (Maximum output with Minimal Cost incurred).

Analyzing Economic Resources:

In economics goods are classified as Tangible products like food items, cars, televisions, Money, tables etc and the services include all Intangible stuff like education, Insurance and most importantly tourism, mentoring etc. One of the major methodologies regarding all economic resources is that they are Scarce (Or limited) in supply (Riley, 2006). All tangible resources specifically are scarce like oil, coal, machines, trained Humans etc and as there is a shortage of it they have a price in order to have its value and these scarce resources would not be utilized by every second person and go out of resources earlier than expected. As budgets are limited too that are the cash that a person has in his/her pocket people are forced to make a choice when buying or having a desire to utilize the resources, hence they the thing that they choose become their asset and the thing left out in a choice becomes its Opportunity Cost(Next best alternative Forgone) (Riley, 2006). Economics has now categorized the economic resources that are used to produce such goods and services into four major parts that are following:


Land does not include a fallow or an unproductive place but it land in economics refers to all those natural physical resources present on earth (Riley, 2006). In other words it is said to be all gifts of nature like Minerals, fisheries, oil fields etc. Taking an example of Mining, mining is a process to dig coal out of the earth. That part of earth is a fertile farm land that is exploited in order to have coal with suitable climatic conditions for work and that nature or product to grow. Some countries are gifted with richly endowed natural resources and then specialize themselves with the extraction and production of such resources. The development of the North Sea oil and gas in Britain and Norway is one of the popular examples of Land. Countries that lack in the presence of natural resources heavily depend on imports in order to fulfill their need (Riley, 2006).


It is the Human input that contributes mainly during the production processing stage. Though it's a human input and there's a quotation about the humans that "All fingers of a hand are not of the same size" hence there is different output produced with different personnel. Main reason for this to occur is specialization, education, experiences and natural instincts in people that differ from one another (Riley, 2006). Hence the size and quality of a labor force is a major contention for the countries to grow economically because as everyone knows the better the output be, the more value will that output gain as compared to the others. Some of the examples of the Labour are semi-skilled labour, unskilled labour, skilled and Professional Labour (Specialized).


Capital for an economist is not the amount of investment made by an individual in a business in monetary terms but it is an investment in capital goods (man made resources) that are used to make other consumer goods and services in future (Riley, 2006). Capital is divided into two more parts that are fixed capital and working capital. Fixed capital includes machines, plant and equipments, new technologies and other buildings. Working capital refers to finished or semi finished goods that are to be consumed or are further processed to be made finished consumer goods. In order to improve the productivity of labour new technologies are introduced with latest machineries that are the said to be capital inputs and it also includes Infrastructure which is an essential element of economic system as infrastructure includes roads, railways, technology, telecommunications e.g. cables and satellites to enable web process and docks etc (Riley, 2006).


An entrepreneur manages, innovates with a use of all the above factors of production in order to produce an output in a way that all resources are effectively and efficiently utilized to have a maximum productivity in order to earn profits as they are willing to assume to all emotional, economical, financial and psychological risks associated with organizing for production and operating a business (Riley, 2006).

Economic System:

An economic system is a mixture of production, consumption exchange and distribution of goods and services of an economy. It is composed of people and institutions, including their relationships to more productive resources, such as convention of a property. Modern day economic systems include free market (Capitalist system), planned economy (socialist systems) and mixed economies. Free market economy is a producer and consumer based economy, that is there are private investors in the market that produce goods and services in a market and as there's consumer sovereignty, hence, the producers try to produce more of the goods that are recommended by the consumers. United Kingdom is a major developed capitalist economy with the standings of sixth largest in terms of GDP and seventh largest in purchasing power parity in the world (2008-2009 estimation). Since the recession has adversely affected the whole world, and the same way it affected United Kingdom, so, it has forced big firms like Cadbury to be taken over by other foreign firms with Kraft being the highest bidders for Cadbury (one of the biggest firms in UK) in 2009. The government had great concerns with its economy and also tried to nationalize some of the firms to turn it into a mixed Economy where both, market and planned, economies take place but it failed and now UK is up to the task with a free market economy to boost up their economy. There are a number of investors with in the market as well as foreign markets though it has been history that UK companies have never been taken over or merged by foreign investors and the foreign investments had been previously termed as closed but the recession has forced them to open up their market for the foreign investments to increase number of companies, more brand names to exist, more productions to occur in the market and build up their economy up to the mark that it would be as it was before the time of world economic recession.

Market Structure:

Market structure is a way how market how number of firms effect in every sector of a market. There are four types of market structures. One of them is perfect competition in which there are numerous firms producing a product in a particular sector of a market. Here the competition is stringent and the change in price of one firm greatly affect's its competitors. In this sort of structure there are NO barriers to entry or exit and normally firms use to enter into competition gain experience and back out but the problem is that it focuses a bit too much on a certain product and it sometimes turn out to be monotonous for the consumers but the quality that the firms provide is very high as compared to the other structures. Second is Monopoly, where there is just one firm in a particular sector producing a product and there are artificial barriers to entry and exit. Artificial barriers are those barriers that a firm's reputation and strength builds up in the market. As there is only one firm producing a product it is very tough for the other firms to enter and gain the same amount of consumers. In this type of structure the quality provided most of times is very low by the firms as there is no competition and they know that consumers have no other option but to buy their product but firms in this sort of structure mostly keep high prices and can keep the quality high in order to keep their reputation up to the mark in the market and capture the market further by improving and expanding further. Third is monopolistic competition that is an imperfect competition that is there's a competition between differentiated products. Firms usually behave like monopolies in the short term, but in the long run other firms enter the market and gradually turn it into a perfectly competitive market and no business has a total control over the market price and consumers perceive that there are non price differences among the competitors' products with few barriers to entry and exit. In the short run they have the same benefits and constraints as the monopoly market has and in the long run they equate perfect competition with the only difference in the characteristic of Non price competition.

In UK every sector includes perfect competition like the industry and the automobile sector and only the mobile sector had a monopoly but now many competitors have entered the market and switched now to perfect competition.

Government Intervention:

Government intervention in UK has now become a significant issue for the people of UK. As many economists measure rivalry by calculating a concentration ratio in the supermarket sector Tesco that used to control almost one third of the UK's grocery market, people had great concerns and wanted government intervention to intervene and investigate if the tactics of Tesco in capturing the market were legal (Socyberty, 2007). Government theoretically has the authority of intervening and forcing Tesco to sell off major stores and restrict growth into other areas but practically it has become impossible for the government to do that because Tesco is a powerful company and are doing NO harm all together to the economy of UK, hence, they are not stopped from creating the barriers in the market themselves and with small foreign companies are benefited too with collaboration with Tesco (Socyberty, 2007). UK has relatively open economy and the government has little intervention with larger mergers or acquisitions involving UK supermarkets.


United Kingdom has three ways of measuring inflation but the method that UK government gives most preference is Consumer Price Index (CPI). This has replaced Retail Price Index (RPI). The estimations from both the methods give different values due to many reasons. Both the CPI and RPI are an attempt to measure the changes in the cost of buying a representative basket of goods and services of UK (BBC News, 2007). Though the indexes used to calculate both are similar but each month thousands of prices for a selected goods and services are analyzed to check on any fluctuation. Some goods and services carry higher weighting that reflect the fact that people spend more on some items than others. Every year the make up of the basket of goods and services and the weightings assigned to them are revised to take changes of spending patterns into account. For example now days people have intended to spend more on electrical goods, travel and leisure, while the proportion they have spent on necessity items such as food has fallen. CPI is often criticized as an exercise in official self-delusion of excluding most housing costs and giving lower Inflation rates. In 2008 CPI was up 3% from January to April, the RPI was up with 4.2% (BBC News, 2007). Alarmingly the CPI rose in April alone with 0.84%, equivalent to an annual rate of 10% (BBC News, 2007). The RPI rose 0.925% in April with an annual rate of 11.1% (BBC News, 2007). On all measures, rise in energy bills and food prices were driving inflation higher. Currently the official measures do not reflect reality for hard pressed families, unofficial indices have been deprived. For years now, prices of computer and clothing have been held down by intense competition. That has kept total inflation of UK low - but now this is being swept aside by the tide of increases in oil and other raw materials.


The Unemployment refers to the number of people who are sitting back home not working anywhere and those people who are actively seeking employment. There are four types of unemployment; Cyclical, seasonal, frictional and structural unemployment. Seasonal unemployment is for those people who work in the firms that produce seasonal products and remain unemployed rest of the year. The type of unemployment that exists because a job search takes time is sometimes referred to as frictional unemployment. A Persistent mismatch between labour demand and supply arising from e.g. shortage of skilled labour relative to available jobs or unbalanced growth in labour demand across regions or industries is a structural unemployment. In UK during 2009 the number of people claiming jobseeker's allowance increased by a relatively small number of 23,800 in June to a massive 1.56 million (Seager, 2009). Not only that Unemployment shot up by a record 281,000 in the three months to may, with a jobless rate topping 10% in one region for the first time in this recession (Seager, 2009). This rise has taken jobless to 2.38 million, the highest level since 14 Years (Seager, 2009). Youth unemployment jumped to a 166 year high of 726,000 after a quarterly rise 95,000 the biggest on record and the number of people deprived of work for longer than 12 months rose by 46000 to 528000 the highest since 1998 (Seager, 2009).

Absolute and Comparative Advantage:

Having absolute advantage over other country in producing a product means that a country is having an advantage in producing a product by utilizing lesser number of resources and a more number of outputs as compared to other. Having comparative advantage means that lesser resources are sacrificed in order to make that product or lesser time consumed. E.g. Suppose there are only two countries in the world, UK and US, and they are able to produce only two goods, wheat and cloth, using only one factor of production "Labour". Each country is endowed with 10 units of labour i.e each has 10 workers. It all depends on how productive the two countries are in producing certain goods. This can be measured in two ways, wither by labour productivity (defined as output per labour) or by unit labour requirements (defined as units per labour per unit of output). One is just the reciprocal of the other. Now the unit labour requirements are said to be For US Food (hr/lb) 0.01 and cloth (hr/lb) 0.02 and for Uk food is 0.02 (hr/yd) and cloth is 0.01 (hr/yd) (Deardorff, 2003). Now we can clearly see that US requires 0.01 hours of labour to produce 1 pound of food, while UK requires twice that much. The corresponding labour productivities are 100 pounds of food per hour of labour in US and 50 pounds per hour in the UK. As far as cloth is concerned the numbers say that production of a yard of cloth requires 0.02 hours of labour in US and only 0.01 hours of labour in UK (Deardorff, 2003). So that productivities are therefore 50 yards of cloth per hour in the US and 100 yards of cloth per hour in UK (Deardorff, 2003). Now we can analyze easily that US labour is more productive in producing food than UK and UK labour has an edge in producing a cloth. In this case we say that US has an absolute advantage over UK in Food and UK has it in producing a Cloth (Deardorff, 2003). Now the countries can either produce completely the same product in which they have an absolute edge over the other or they can go with producing both the goods if they have a comparative advantage over the other in the production of cloth or food.

Terms Of trade:

Terms of trade are an important aspect for a country as they tell the relative prices of a country's imports and exports. The exports are the goods that are being sent to the foreign countries and the imports are the goods that are borrowed from the foreign countries. The balance of trade depends on exports and imports and countries usually find it out annually to check if their balance of trade gives surplus (Exports>Imports) or deficit (exports<imports). For UK the Exports in 2008 were 442.2 billion and imports were 621.4billion giving a net deficit to the balance of trade of 179.2 billion (BBC News, 2007). The overall Gross Domestic Product GDP (the products that are made with in the country) in 2008 was 2.674 trillion with a rise in GDP growth in the fourth quarter of 2009 of 0.3% and GDP per capita income in 2008 was $43,785 (BBC News, 2007). Inflation in the final quarter of 2009 was 5.7% and unemployment was 7.8%. UK being a popular country has ruled many countries throughout the previous centuries hence they have no trade barriers with any country but in order to block some of the imports and decrease their trade Deficit UK government has imposed Tariffs(amount of tax added to increase a products price) to discourage users from using the imported goods and plan to settle their balance of payments as well by increasing more of the intangible exports to various countries. Bank rate changes in march 2009 were 0.5% (BBC News, 2007). The exchange rates at the start of 2010 are pretty much good as compared to 1 pound sterling an American$ is 1.4957 better than the previous quarter and Euro is 1.10327 worse than the previous quarter as far as UK is concerned (BBC News, 2007). UK government hopes to have a better 2010 as far as its economy is concerned and hope that all deficits are turned into Surpluses.