United Kingdom


The purpose of this paper is to provide analysis of the United Kingdom monetary policy and compare it with the United States indicators. Measuring the national Gross Domestic Product and purchasing power the economy of the United Kingdom is one of the largest in the world. In order to compare its economy with the United States economy the following indicators were used: real GDP, real GDP growth rate, current account balance, central government debt, official exchange rate and consumer price index. These indicators were taken from the World Bank  world development indicators and International Monetary Fund databases, and illustrate countries monetary policies for the period of 2006-2015 years.

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Data analysis

Regarding the trends in real GDP growth it could be stated that both United Kingdom and United States have face significant decrease in GDP growth rates in 2009. However, despite of this fact the real GDP of the United Kingdom increased from ?14,792 billion in 2006 to ?16,548 billion in 2015. Additionally, the Price Waterhouse Coopers  forecasts that the UK GDP growth rate will continue to lower from 2.0% in 2016 to 1.2% in 2017. Comparing with the United States GDP the United Kingdom has much less economy size, even regarding the fact that in 2015 the official exchange rate of the U.K. national currency was $0.65 per ?1.

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On the other hand the central government debt of the United Kingdom is significantly lower than the United States total government debt. According with the graph in the figure 2 in 2015 the total debt of the central government of the United Kingdom was ?1,663 billion, while the U.S. total government debt was $18,965 billion. In the US dollars the U.S. government debt is 7.5 times higher than the U.K. government debt. Further, the graph in the figure 2 also shows that growth rates of government debt for both countries have increased with similar speed during the last 10 years. However, the growth rate of the U.K. government debt is lower for 20 p.p. in average than the U.S. one. For instance, in 2006 the growth rate of the U.K. central government debt was 41% and of the U.S. central government debt was 63%, while in 2015 these rates have increased to 88% and 105% respectively. However, the similar thingю.

Further, the analysis of current account balance for both countries was conducted. Since the current account balance can be calculated as the sum of net exports of goods and services, net primary income, and net secondary income its negative value shows that exports of goods and services exceeds the imports of goods and services, etc. Thus, according with the graph in the figure 3 both countries have had negative balance of payments during 2006-2015. Thereby both the United Kingdom and the United States have allowed their economies to fall in deficit of goods and services. However, the share of these deficits in countries GDP significantly differs. According with the fig. 3 during the period of 2006-2009 the United Kingdom current account balance share in GDP was increasing, while the U.S. balance of payments share in GDP was decreasing during 2006-2011. Further, after 2012 the trends in countries balance of payments changed oppositely, and at the result the share of the U.S. current account balance in GDP has become -2.57%, while similar indicator for the United Kingdom has increased to -5.37%. Additionally, as the fig. 3 shows the United Kingdom is fully engaged in the global economy. However, its balance of payments is 3 times lower than the United States balance of payments.

Additionally, the analysis of the countries exchange rates trends supports the theory of Purchasing Power Parity. According with the figure 5 the consumer price indexes for U.K. and U.S. have constantly increased from 89.38% and 92.95% in 2006 to 111.84% and 108.69% in 2015 respectively. In 2015 the official exchange rate of the U.K. currency has depressed for 20% comparing with 2006, while the consumer price index in the U.K. has increased for 25%. On the other hand, the U.S. consumer price index has increased for 17%. Thereby, during the last 10 years the purchasing power of U.K. citizens has decreased, comparing with the purchasing power of the U.S. citizens and nowadays the United Kingdom currency is undervalued comparing with the U.S. dollar. Moreover, the UK exchange rate has sharply decreased after official decision to leave the European Union in June 23, 2016.

Further, despite of the fact that during the last years the country exchange rate decreased from ?0.49 per US dollar in 2007 to ?0.65 per US dollar in 2015 the overall trend of increasing the negative balance of payments still exists. Thus the decline in the exchange rate means that that the relative price of import has increased. Thereby, at the result of such policy national importers of raw materials, for instance, will face worse market circumstances, since the import has become more expensive. On the other hand, exchange rate depreciation also means that national exporters will gain benefits and force the export value increase. Since the negative share of the U.K. current account balance in the GDP continues to increase, these steps are necessary for decreasing a gap between its import and export, and, thereby, lower the negative share of account balance in the GDP.

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Consequently, the United Kingdom economy is well-performed. However, comparing with the United States it faces several issues regarding the exchange rate stability and the value of the net balance of payments. On the base of the provided analysis it could be concluded that due to the slowdown in the GDP growth rates and other negative economic conditions the United Kingdom may increase its public borrowing over the next few years, thereby increasing its central government debt. However, in order to overcome with the given issues the country should focus on ensuring stable currency price and directly inject money into economy, which will stimulate the economic development.

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