Why Do Market Economies Need Government United Kingdoms Economic Essay

Why Do Market Economies Need Government United Kingdoms Economic growth, Inflation and Unemployment - Essay Example Such situations create disadvantages of buyers and reduce buyer surplus for those particular markets. For this reason, free market economy can potentially impinge on the rights of a certain segment in the economy (Acemoglu, Golosov and Tsyvinski, 2008). A fair exchange implies a relationship of equality between the persons concerned, which is absent in these scenarios. Sometimes, in a market economy the employer and the employee are not in a relationship of equality. The employer can attempt to dictate terms to the employees, therefore, a safeguarding body is required to ensure payment of minimum wages and to enforce health & safety measures (Agarwal, 2007). Government presence in needed in such situation to ensure rights of certain groups is not compromised. ii) Governments are needed to provide provision of pubic goods whose benefits are distributed over a very large population. For instance, creation of roads and national defense cannot be provided by a private enterprise. Government interventions are needed in the market economic system for these provisions (Halm, 2003). iii) Governments are also needed in market economic systems to provide social security to the citizens of the country. A market economic system cannot find mechanism to transfer funds from rich to poor. Governments serve the purpose of reducing income differences between rich and poor in an economy (Sharma, 2009). Government invention is, therefore, essential for redistribution of wealth and income for a healthy society. United Kingdom’s Economic Performance During Last Ten Years Growth Performance data of United Kingdom’s economy is graphed below. The data exhibits that the economic performance and growth rate of United Kingdom’s economy was at peak in the year 2000. The growth rate of the economy was highest which implies that the standard of living of UK citizens was increasing at a very rapid pace. GROWTH PERFORMANCE Year GDP Change 2000 3.90% 2001 2.50% 2002 2.10% 2003 2.80% 2004 3.00% 2005 2.20% 2006 2.90% 2007 2.60% 2008 0.60% 2009 ?4.9% 2010 2.10% 2011 0 .70% Growth of UK’s economy hit the bottom in the year 2009. It appeared that the economy is on the path of improvement in the year 2010; however, growth figures were low again for the year 2011. Growth Performance the annual inflation figures of UK economy shows that inflation is rising even though growth rate of the economy is slow. Such figures are considered alarming because standard of living of people is compromised in two manners – through low income growth, at the same time, a considerably high level of inflation (Baumol and Blinder, 2011). Annual Inflation Year Inflation Rate 2000 2.1% 2001 2.7% 2002 1.3% 2003 2.9% 2004 2.6% 2005 3.2% 2006 2.4% 2007 4.2% 2008 4.1% 2009 0.1% 2010 3.7% 2011 5.1% Unemployment Rate of UK’s economy is exhibiting a trend of rising with the inflation rate of the economy. This is considered one of the most challenging macroeconomic situations in macroeconomic text books. This is because a high inflation is generally associated with lower levels of unemployment since all factors of productions are considered to be highly utilized. Rising unemployment with inflation indicates major issues with the economy which need to be resolved (Henderson, 2003). Unemployment Rate Year Rate 2001 5.1% 2002 5.2% 2003 5.0% 2004 4.8% 2005 4.8% 2006 5.4% 2007 5.4% 2008 5.6% 2009 7.5% 2010 7.9% Deflationary Gaps and Appropriate Policy Responses Deflationary gap in an economy is