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Chapter 12 Domestic Economy


Chapter 12 Domestic Economy November 2007 Xiao Huiyun A1 Introduction Britain s mixed economy is an economy that is made up of privately owned and state ... – PowerPoint PPT presentation

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Title: Chapter 12 Domestic Economy

Chapter 12 Domestic Economy
  • November 2007
  • Xiao Huiyun

A1 Introduction
  • Britains mixed economy is an economy that
    is made up of privately owned and state owned
    enterprises. Most businesses in Britain are
    privately run and it is left to the state to
    control major services such as health.
  • During the 20th cent. the government has become
    involved in the economy through introduction of
    social welfare policies and laws to regulate
    industrial relations
  • In 1945 to ensure full employment, labour
    govern. began to nationalise key industries such
    as coal, steel and transport.

A 1 Introduction cont changing of winds
  • By the end of the 1970s Margaret Thatcher had
    started to sell back those industries to the
    private sector, to beat inflation, which was her
    primary objective.
  • In politics if you want anything said, ask a
    man. If you want anything done, ask a woman
    Margaret Thatcher

A 2 Natural Resources Infrastructures
  • 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 playing important role
  • Services, industries such as chemicals,
    electronics, etc all doing well, important parts
    of British economy

A 3 Finance
  • There were 296 branches and subsidiaries of
    foreign banks in London in March 2002, more than
    in any other centre worldwide. A third of these
    banks are from the euro area. Foreign banks
    manage over one half of UK banking sector assets,
    totaling over 3,500bn, mainly on behalf of
    foreign customers.
  • The UK banking sector originates more cross
    border bank lending than any other country - 19
    of the world total in March 2002.

A 3 Finance
  • Insurance
  • The UK insurance industry is the largest in
    Europe and third largest in the world with net
    premium income of 157bn in 2001. London is the
    world's largest international insurance market,
    with gross premium income of 20.0bn in 2001. It
    is the main skill centre for world reinsurance
  • The UK is the global market leader in aviation
    and marine insurance, with a combined market
    share of 23.

A 3 Finance
  • The London foreign exchange market is the largest
    in the world, with daily turnover of 504bn in
    April 2001, accounting for 31 of global
    turnover, more than New York and Tokyo combined.

A 3 Finance
  • London is the world's largest fund management
    centre, with 2,460bn of institutional equity
    holdings in 1999. Assets managed in the UK on
    behalf of domestic and overseas clients totaled
    over 2,800bn in 2000. London is the leader in
    the management of overseas clients non-domestic

A 3 Finance
  • The number of foreign companies listed on the
    London Stock Exchange is second only to New York.
    In the first eight months of 2002, turnover in
    these companies booked in London accounted for
    56 of all trading in foreign companies around
    the world. Turnover in euro-area stocks accounted
    for nearly two thirds of all foreign equity
    trades booked in London. London is the major
    centre for the international bond market.
    London-based book runners accounted for about 60
    of international bonds issued, with 70 of
    trading in the secondary market, including
    euro-denominated issues, also based in London.

A 3 Finance
  • Statistics show that banking, insurance, foreign
    exchange, fund management, securities dealing are
    the key aspects of the Citys international
  • Since the euro was launched in 1999, London has
    consolidated its position as the premier
    financial centre in Europe and has become the
    leading centre for euro trading.
  • London is a leading centre for international
    financial market beyond doubt.

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

The Bank of England
  • Whilst all the important institutions mentioned
    so far are privately owned commercial bodies, the
    Bank of England is not. It is the central bank of
    the UK a nationalised industry operated on
    behalf of the government.
  • The Bank of England controls the currency and
    acts as banker both to the government and to the
    commercial banks. It also plays a key role in the
    governments monetary policy.
  • It aims to maintain the integrity and value of
    the currency, maintain the stability of the
    financial system and ensure the effectiveness of
    the financial services sector.

The Bank of England
  • The Bank of England has a monopoly of the
    bank-note issue in England and Wales, though
    certain banks in Scotland and Northern Ireland
    have limited issuing rights.
  • Fundamental changes to the Banks role took
    effect under the Bank of England Act 1998. In
    particular it acquired operational responsibility
    for setting interest rates.

A 4 The Mixed Economy
  • Private Enterprise -- enterprises other than
    those nationalised/public ones.
  • Different forms of business organisation Single
    Proprietorships, Partnerships, Co-operatives,
    Joint-stock companies pp 205 206

A 4 the Mixed Economy cont
  • Some possible or potential advantages and
    disadvantages of the various types of company
    organisation include
  • The single proprietorship
  • Such businesses are easy to set up and the owner
    can easily maintain full control. However,
    because of the limited amount of capital that
    owners can raise for themselves, such businesses
    are usually small. Moreover, as owners have to
    take all the legal and financial responsibilities
    themselves, in todays strong competition, the
    single proprietorship is no longer of so much
    importance in the UK.

A 4 the Mixed Economy cont
  • Partnerships
  • Such businesses can raise larger amount of
    capital and, consequently, are greatly bigger.
    Partnerships, however, suffer in the same way as
    do single proprietorships in that each partner is
    legally liable for all the debts of the firm,
    even if they have been incurred by the activity
    of another partner.

Such businesses can raise larger
A 4 the Mixed Economy cont
  • Co-operatives
  • Such businesses operate mainly in the retail
    trade. The most distinctive feature of
    co-operative societies is that they belong, in a
    sense, to some of their customers who pay a
    minimum deposit on a share in the business.
    Consumer co-operatives have proven to be rather
    vulnerable in the face of the intense competition
    from other types of organisation.

Such businesses operate mainly
A 4 The Mixed Economy cont
  • Joint stock companies
  • Such businesses make large amounts of capital
    much easier to raise. For these companies,
    transfer of ownership can take place with a
    minimum of formality. In other words,
    shareholders can sell their shares to anyone
    else. but there also lies a risk here. 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 )

  • Limited Liability means that an investors
    liability to debt is limited to the extent of
    their shareholding. That is to say that if a
    person owns 100 1 shares in a company, in the
    event of its going bankrupt, then the most he can
    lose is the 100 originally invested.

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

Different attitudes
  • Why nationalise?
  • . The post-war Labour government was elected on a
    socialist manifesto, which promised more
    political control over the major public utilities
    so their development could be guided in the
    public interest rather than simply for private
  • In 1945, as part of Britains policy to achieve
    full employment, the Labour Government began to
    nationalize key industries such as coal, steel,
    and transport.

Different attitudes
  • Why privatise?
  • the nationalized industries are economically
    inefficient, when compared to companies operated
    under private commercial influences.
  • In state-owned industries the politicians, as
    "proxy owners", are in charge and so their
    priorities take precedence over commercial ones.

Different attitudes
  • The second reason why state-owned industries
    perform poorly is the plain if unpalatable fact
    that a nationalized industry does not have to
    succeed to survive.
  • Nationalized industries are dependent on the
    government for their survival, not the market.
    What is missing is the spur that drives private
    industry to respond to consumer demands.

Different attitudes
  • The third reason why nationalized industries
    perform poorly is that the basic philosophy of
    state ownership denies and therefore fails to
    harness positively the power of self-interest.
  • Before the practice of privatization, the
    nationalized industries incurred losses on a
    grand scale - losses which had to be financed by
    raising taxes, - as high as 83 top rate on
    earned income, and 93 on savings income.

Different attitudes
  • Generally speaking, the nationalized industries
    were inefficient and were a heavy financial
    burden on the Exchequer.
  • As a result, the economic attitudes have been
    changed towards privatization since early 1980s.

Potential or possible advantages of privatisation
  • It gives ordinary people a direct stake in the
    nations means of production and distribution.
  • It frees those responsible for the industry
    concerned from the constraints imposed by State
    ownership, including governmental intervention in
    day-to-day management, and protects them from
    fluctuating political pressures.
  • It releases those industries from the
    restrictions on financing which public ownership
    imposes (i.e. they could now raise money in the
    City instead of only from the Treasury).

Potential or possible advantages of privatisation
  • Access to private capital markets makes it easier
    to pursue effective investment strategies for
    cutting costs and improving standards of service.
  • The financial markets would be able to compare
    the performances of individual sectors of a
    privatised industry against each other and also
    against those of other sectors of the economy,
    thus providing a financial spur to improved
  • A system of economic regulation would ensure that
    the benefits of greater efficiency were passed on
    to the public in the form of lower prices and
    better service.

Potential or possible disadvantages of
  • In effect, privatisation is simply selling back
    to people what was already their own property.
  • Were the government to allow the managements of
    nationalised industries a genuinely free hand to
    run them on proper business lines, there would be
    no need to privatise them. Most, if not all, of
    the advantages cited above could be achieved
    perfectly well without privatisation

Potential or possible disadvantages of
  • There is not the slightest evidence that widening
    the number of people shares has any effect on
    political attitudes or labour relations. In
    reducing strikes or raising productivity, such
    factors as better management and better
    arrangements for collective bargaining, have far
    more relevance.
  • The true weight of the supposed co-ownership is
    very, very light. As one financial writer
    observed If all these worker-shareholders
    decided to sell their entire stock (of a company)
    on the same day, it is doubtful whether it would
    even register on the Stock Exchange.

A 5 The Role of the Government
  • Taxation Government Expenditure
  • Despite the different attitudes towards
    nationalisation, government influence in the
    economy has grown during the twentieth century.
    (see graph on p 207)
  • During the two World Wars, the proportion of
    income from economic activity devoted to
    government expenditure not surprisingly showed
    sudden increases, to reach a peak of 46 per cent
    in 1918 and 61 per cent in 1942 to 1944. However,
    although the proportion fell back after each war,
    in each case it never went back to its pre-war

Taxation Government Expenditure
  • Throughout the 1980s and early 1990s, an aim of
    government policy was to reduce the share of
    public expenditure of GDP and the proportion fell
    from 46 per cent in 1981 and 1982 to 38 per cent
    in 1983. There was a slight rise in the early
    1990s during the period of economic downturn, but
    in 1998 the proportion had fallen back again to
    39 per cent.

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)

Taxation Government Expenditure
  • Indirect taxes -- 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.

Taxation Government Expenditure
  • Government spending Some of the main areas of
    expenditure for 1999-2000 were
  • social security 102 billion (29 of total)
  • health 61 billion (17)
  • education 41billion (12)
  • defence 21 billion (6)

GDP Growth
  • GDP Growth
  • Average Earning

A 6 Consumer
  • Since 1971 household expenditure has increased in
    real terms in all the broad categories of
    expenditure with the exception of tobacco
  • Some categories of goods and services have grown
    faster than others. For example, spending on
    financial services and UK tourists expenditure
    abroad was almost five times and almost six times
    higher respectively in 1999 than in 1971.
  • In contrast, expenditure on food increased by
    only a quarter in real terms over the period.

A 6 Consumer
  • Look at the table Students expenditure on
    page 210
  • British students have very specific spending
    patterns. According to the Student Income and
    Expenditure Survey, around half of the
    expenditure by students under the age of 26 in
    higher education in 1998/99 was on what could be
    termed essential items, such as accommodation,
    food, bills and household goods and course
    expenditure. Students now pay a larger
    contribution towards their tuition, so from 2000
    the course expenditure would be a higher
    percentage, but it is still mostly paid for by
    the government, Students who lived at home with
    their parents spent on average a quarter of the
    amount on housing of that paid by students living
    independently as they were subsidized by their

Credit Card Revolution
  • Consumer Protection guaranteed by the Consumer
    Protection Act
  • The Credit Card Revolution leading more to Debt