Economic Environment of Business Lecture One: Overview of the UK Economy

What do you need to do in this module? Identify the structure of the UK economy and other economies Investigate the properties of different types of business, finding out how firms grow and the limits placed on such growth by policy makers Discuss the impact of MNCs Discuss international trade and development with reference to IMF and World Bank

What current issues might be studied in this module? You might have included the following: Deindustrialisation Problems faced by small firms Restricted practices Corporate governance Merger and take over activity Globalisation

Why are we interested in the structure of the economy? We want to know how much income, inputs (including employment), output and growth is generated by each of the three broad sectors within the economy:  Primary  Secondary  Tertiary (Services) This has implications for individuals and policy Makers – State why?

What do these sectors do? Primary – extraction of natural resources (coal, oil, fishing, forestry, agriculture etc.) Secondary – production and processing (manufacturing, utilities, construction) Tertiary – everything else – includes private sector (banking and finance, insurance, leisure and distribution) and the public sector (defence, health and education)

How can we measure the relative importance of each section? Calculate the total absolute employment (or income, or growth or output) for the economy as a whole Calculate the same for one sector of the economy Calculate the proportion of the total economy contributed by the sector under investigation The higher the proportion, the more important that sector is to the economy ( see Page 8, Table 1.4 Griffiths & Wall, 2004 for an example)

NB Absolute employment in a sector may rise yet the proportion still fall! Source: Labour Market Trends 2002

Note the similar pattern to the previous graph! Source: Labour Market Trends 2002

From Figures One and Two what do you observe? The UK Economy is experiencing a process of change The UK Economy is becoming increasingly dependent on the Tertiary Sector as a source of income and employment Is this true for all economies? No! Depends on the stage of economic development: Pre- industrial Industrial Post- industrial (De-industrialisation)

Stages of economic development Pre- industrial – primary sector – hunter gatherer etc. Industrialised – development of secondary sector – now a derived demand for tertiary sector (insurance, banking etc.) De-industrialised – dominance of tertiary sector as a source of jobs, income etc. The cheaper raw materials have been used up – costs of primary and secondary sector production up. Industry moving to developing economies (cheaper labour and materials)

Why should we be interested in the relative importance of each sector? We want to find a job -78% of jobs are provided by service sector – so training for a job in that sector seems a sensible investment Government need to know policy implications: E.g. structural unemployment from decline in primary and secondary sectors creates a need for retraining and regional policy due to large scale unemployment

Do we assume that the demand for manufactured goods is declining? NO! We are looking increasingly to imports to meet our increasing demand for domestic appliances, cars etc. Can lead to balance of payments problems, increased public sector borrowing requirements, inflation, over-reliance on suppliers – e.g. Russian gas etc.

Further Implications of Deindustrialisation: Lifelong learning Threats from developing economies and liberalisation of service sector Which of the following do you think is the worst implication?  Public debt  Balance of payments problems  Training requirements  Inflation  Competition from overseas

Summary We identified the three broad sectors of an economy Primary Secondary Tertiary (Service) We identified the process of change in the relative importance of these sectors over time as providers of employment, income, output and growth We identified some of the implications for economies experiencing deindustrialisation

Next Class Firm Objectives: Consider the importance of the structure of a firm in providing a solid base for its profit seeking activities Look at the lecture in advance and make notes