Chapter 12 Domestic Economy

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Chapter 12 Domestic Economy
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Focal questions

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

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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

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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

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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

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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

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Inefficiency of nationalised industries

• Failure to harness self-interest
• Incurment of losses on a grand scaletax raise
  83 top rate on earned income, 93, savings income

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Privatisationadvantages

• 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

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Privatisationdisadvantages

• Good management of nationalised industries no
  need of privatisation (theoretically?)
• Labor relations interest of workers
• Co-ownership worker-shareholdershow much do
  they weigh?

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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

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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

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A 3 Finance

• The financial institutions
• Banks
• Building society
• Insurance companies
• Stock exchange

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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

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A 3 Finance

• BANKING

• London March 2002
• 296 branches and subsidiaries of foreign banks
• 1/3 from the Euro area
• Foreign banks 50 of UK banking sector assets,
  3,500bn
• The UK banking sector cross border bank lending
  - 19 of the world total

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A 3 Finance

• Insurance 2001

• 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

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A 3 Finance

• FOREIGN EXCHANGE

• April 2001
• Largest in the world
• Daily turnover of 504bn, 31 of global turnover
• gt New York Tokyo

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A 3 Finance

• FUND MANAGEMRNT

• UK World's largest fund management centre
• 2,460bn of institutional equity holdings in 1999
• Assets managed on behalf of domestic and overseas
  clients 2,800bn in 2000
• London leader in the management of overseas
  clients non-domestic portfolios

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A 3 Finance

• 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

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Regional Household Income Comparison 2006
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Beneficial ownership of UK shares end 2006
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Private Enterprise

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

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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
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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
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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 )

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Limited Liability

• Limited Liability
• An investors liability to debt is limited to the
  extent of their shareholding
• 100 1 shares bankruptcygreatest loss, 100

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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

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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?ID7363

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Taxation Government Expenditure

• Indirect taxes (P208)
• VAT (VAT was introduced following Britains
  membership of the EEC a percentage of the money
  raised is contributed to the European Union
  budget.)
• Duties on alcohol, tobacco, petrol, etc.

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A 6 ConsumerStudents 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

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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

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Real GDP quarterly growth
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• http//www.economywatch.com/world_economy/united-k
  ingdom/
• http//www.statistics.gov.uk/cci/nugget.asp?id155
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• http//www.statistics.gov.uk/cci/nugget.asp?id107
  
• http//www.statistics.gov.uk/CCI/nugget.asp?ID192
  Pos6ColRank1Rank144
• http//economicsguide.blogspot.com/