Economics Assignment: How Changing Perspectives Of Fossil Energy Impacts UK?

Question

Task:
This economics assignment requires you to write an individual essay by picking one of three options below:

All over the world there is an increased focus upon climate changes. There seems to be an agreement that one of the reasons is the use of fossil energy. Therefore, it is expected that there will be an increased focus upon reductions in the use of fossil energy.

A reduction of fossil energy can be achieved in two different ways. Either by improving the existing equipment so it gets more energy efficient or by development of new technology that doesn’t use fossil energy.

1. Explain the concept of demand and supply in relation to the UK market for electrical vehicles aimed for the transport sector. Include equations and diagrams in your answer. (40%)
   Critically discuss how understanding of the concept of demand and supply could be useful for the management of a UK- based supplier of electrical vehicles for the transport sector.
2. Explain the structure and market conditions of the industry that supply the market with fossil energy aimed for the transport sector.
   Critically discuss how demand/supply of fossil energy could be reduced. Suggest what might be done in relation to correct eventually market failures in the demand/supply of fossil energy, since the use is higher than desired by the government. Include relevant economic theories and models in your answer.
3. Discuss the potential macro-economic effects on the British economy related to changes in employment due to changes in the use of fossil energy mainly in the transport sector. Here effects related to distribution of alternative forms of energy and the effects on the garages could be treated.
   Explain and discuss the possible effects on the overall economy in the UK, based upon changes in GDP due to changes in the overall employment. Please include and elaborate on relevant theories and models from the course in your answer.

Answer

Introduction

The essay prepared within this economics assignment has considered the macroeconomic effects of the changes brought about in the UK due to changing perspectives of fossil energy. The essay is concerned with the changing employment pattern and its effect on the economy. Furthermore, it evaluates the potentiality of the distribution of alternative energy sources and the effect on the existing garages. The relevant theories and models have been included in the essay to evaluate the changes in the overall economy of the UK due to change in the GDP. The essay has included some recommendations to analyze the changes on the overall economy of the mentioned country.

The increasing demand for renewable sources of energy all around the world has made the government of the UK to shift its focus from fossil fuels to electric energy as an alternative source. The demand for electric vehicles is also increasing in the country. The government has some alternatives to deal with the changed scenario (Ahmad et al., 2017). The improvement in technology or changing the equipment of products can reduce fossil use but it has a negative effect on the unemployment situation of the country. The essay has tried to analyze the multiple aspects related with the mentioned issue using some of the prominent economic theories. 

Discussion

The reduction in the use of fossil fuels and introduction of renewable sources of energy in the transport sector results in the increasing demand of electric vehicles in the UK (Tee et al., 2017). This shifting of manufacturing technology and operational techniques has made many employees lose their jobs in the fossil energy sector due to lack of competencies. Furthermore, the reduction in the demand for transportation that uses fossil fuel forced the companies to cut production, which also caused many people to lose their jobs in the relevant sector. On the contrary, the production of electric vehicles has not reached up to that level in the UK which can consume all the employees that lose their job from fossil fuel manufacturing companies and the result of this scenario is high unemployment (Agnihotri and Arora, 2019). This form of unemployment can be classified as structural unemployment. Under these circumstances, structural unemployment happens due to changes in the dominant technologies of production of the economy through fossil fuels and the demand for this worker is lower compared to the labour supply whereas those employees have no training for an effective output in the transport sector that uses renewable energy.

Moreover, evaluation of macroeconomic effects due to change in employment has been done by considering the short term as well as long term effects on the macroeconomic indicators namely, inflation, balance of payments (BOP), savings, consumption, interest rate and GDP growth. The effect on inflation due to unemployment can be evaluated using the Phillips curve which holds that in the short run inflation and unemployment are inversely related as can be seen from the economy of the UK. The lowering of inflation has reduced further investment in the economy which also has a severe effect on unemployment indirectly. Furthermore, unemployment has influenced the GDP growth of the economy (Ökten et al., 2019). The structural unemployment arising out of the reducing production and usage of fossil fuels has diminished the aggregate demand for goods or services in the economy. The low demand reduces production thereby affecting the GDP negatively in the UK. The prominent laws of economics such as Okun laws also pointed out that up to a certain rate of GDP growth is inevitable for a sustainable rate of unemployment. Additionally, the effect of unemployment can also be traced in the macroeconomic indicator of interest rate. Raises in unemployment rate have forced the authorities to adopt monetary policies of reducing interest rate in the UK to encourage new investment and sustain the existing one ton avoid further worsening of the situation of the economy. 

The analysis of the movement of macroeconomic variables, namely savings, has shown that due to increase in unemployment the income reduces that makes the people to save less for present consumption and it is also evident that due to reduction in income some people find savings is a better alternative for future survival which makes a tradeoff between the people’s anticipation of the continuance of highly unemployed situation with their reliance on the alternative sources of income that is employment in renewable energy sector in the present case (Batten, 2018). However, the results of the study of consumption is unilateral which reveals that reducing employment rates have lowered the income of the average people in the UK thereby the net consumer expenditure decreases under the given scenario although some people have brought electric vehicles in the economy (Fernandes, 2020). The balance of payment of the UK is too much dependent on the import of fossil fuels and decreases in the GDP growth of the country in the transport sector. BoP shows that it increases but with an insignificant amount because the UK has started exporting electric vehicles at a very small scale and that has also added with some of the positive effect of reduction in fossil fuels. 

Effect on the distribution and application of alternative sources of energy has been started in the UK and the use of electric vehicles in the country has tried to alter fossil fuels. The reduction in fossil use has made the citizens demand for some alternative which is sustainable. This situation has increased the demand for electric vehicles in recent years. The market structure of electric vehicles is Oligopolistic in nature where only few firms operate in the market. The low production capacity has limited their employee intake policy and they cannot give jobs to every employee who has lost their job due to these structural changes in the economy. On the other hand, unemployment has incentivised the government of the UK for rapid distribution of the alternative sources to enhance the production capabilities of the firms so that they can increase their capacity of employee intake through upgradation of scale of production. Moreover, the garages of the transport sector are highly affected by the rising unemployment rates in the UK after the reduction in the usage of fossil fuels. Effect on garages can be seen as the structural changes in the transportation sector have made it inevitable for the technicians to acquire new knowledge regarding the electric vehicles. Furthermore, some of the technicians have lost their job and the garages have to change the infrastructure of the garages as per the changed scenario. 

Additionally, the effect of changing GDP on the overall economy can be evaluated by considering the micro and macro indicators of the economy (Ilemona and Sunday, 2018). The essay has considered the changes in inflation, interest rates, income, savings as macro variables and competition level, consumer choices, market structure of the economy as micro variables.GDPhas its impact on almost all the variables of the economy which can be highlighted as decreases in GDP has lowered the inflation of the UK for the current period. Furthermore, the mentioned situation has also had a mixed effect on the individual savings but the aggregate savings of the economy increases since the potentiality of renewable sources have been established by the increasing demand for electric vehicles in the country. The microeconomic variable of consumer choices has affected GDP as the consumers are bending towards nonrenewable sources in the form of electric vehicles and thus the income from the sale of fossil energy has shrunken thereby reducing the GDP of the UK (van Meijl et al., 2018). The decrease in GDP mostly due to lesser use of fossil energy and availability of sustainable alternatives also influenced the customer’s choices in favour of electric vehicles.

Moreover, GDP changes have brought changes in the interest rate of the economy which have also decreased that have been highlighted through relevant economic models in the essay. Additionally, in response to shrinking output of the economy the private consumption has also decreased, which has further worsened the economic situation of the UK in the mentioned time period. Apart from that, the reason for the GDP reduction has caused a change in the market structure of the economy which has marginalized the competition that existed in the transport sector of the economy. The rising unemployment and resultant reduction in GDP has also affected the socio-economic structure of the UK (Inekwe et al., 2018). The poverty has increased in some sections of the society and due to decrease in private purchasing power they cannot sufficiently spend on health as well as education of their family members. The social burden of the government has increased and now the policy makers have to invest in social sectors instead of economic infrastructure that has a devastating effect on the linkage effect of the economy.

The theory of demand and supply can be used to analyze the situations that have caused a change in the GDP growth of the UK. The introduction of electric vehicles and diminishing use of fossil energy has decreased the demand for the employees that have expertise in the fossil fuel sector thereby producing a downward sloping demand curve whereas the availability of workers who have lost their jobs have made supply curve upwards.

Figure: Theory of demand and supply

(Sources: Agnihotri and Arora, 2019)

The decreases in demand for labourers have reduced the market wage of the labourers below the minimum wage thereby creating labour surplus situations which have affected the demand for other goods and reduces the GDP of the UK up to a substantial level. Furthermore, Keynesian theory of unemployment also holds that GDP can become affected by unemployment which is mainly caused by the reducing consumer expenditure in an economy. This is a cyclical process where unemployment leads to reducing demand for the goods and reduction in demand enforces less production through job cuts which again leads to unemployment (Chipeta et al., 2017). The inflation in the economy reduces since the lower market wage for employees have enhanced unemployment which hampers GDP due to less demand for goods and also the general price level of the UK tends to reduce for fossil fuel transportation sector. Furthermore, effects of change in GDP can also be established using the IS-LM model of macroeconomics. The model has taken the intersection of two curves one is investment-saving curve and the other is money supply or liquidity preference curve.

Figure: Macroeconomic model

(Sources: Self created)

The figure of the ISLM model shows that output has been taken in horizontal X- axis and interest rate has been taken in the vertical Y-axis of the quadrant. The initial equilibrium between the interest rate (i) and output(y) has been established at i2 and Y2 (Badgett et al., 2019). The reduction in employment has caused a leftward shift of the IS curve due to decrease in private investment which has reduced the output from Y2 to Y1 in the same way it shifts interest rate from i2 to i1 and equilibrium of the economy also shifts backward thereby showing a shrinking of the economy. The model shows the effect of change in GDP on the interest rate of the economy. 

Analysis of the mentioned arguments reveals that unemployment has a negative effect on the GDP of the UK. Although the reduction is not very serious due to the adjustments made by the increasing potentiality of the alternative energy sources, it has affected all the macro and micro economic variables of the economy with intensity in the overall economy. The changes in GDP have lowered the inflation, consumer expenditure, interest rate of the economy whereas it has increased the balance of payments of the country due to the mixed effect of import and exports. Furthermore, the macroeconomic variable of savings has mixed effects for the UK due to the unemployment driven GDP changes as mentioned in the scenario. The evaluation also reveals that the microeconomic variables are also affected by the GDP changes. The competition in the economy has reduced in the electric vehicle sector where the market structure has transformed into oligopolistic in nature since a small number of sellers in the mentioned infant industry. The effect of the GDP on socio-economic perspective also released a dull picture of the society (Aguilar-Hernandez et al., 2021). Moreover, the choices of the consumer have also affected the GDP of the economy which is indirectly influenced by increasing rate of unemployment. GDP has its effect on the overall economy of the UK in its own intensity.

Conclusion

The essay has included an analysis of the given scenario in the UK and it also contains some suggestions that may be used by the government for its future decision making. The government has to conduct appropriate stakeholders’ analysis to address the issue of all the related people since this scenario affects a majority of the citizens either directly or indirectly. Moreover, the use of artificial intelligence, automation, robotics and GPS tracking systems should be used in the manufacturing process to enhance their efficiency thereby reducing further use of fossil energy. Appropriate fiscal policies such as unemployment benefits should be taken to address the issues of unemployed people who have lost their job due to the shift from fossil to renewable sources of energy.

The essay has successfully analyzed all the relevant issues related to changing scenarios in the country. The effects on the economy have been structurally present from an economic point of view. The models have evaluated the effects on macroeconomic factors such as interest rate, inflation and others due to changes in the GDP. The analysis of the arguments and appropriate suggestions are presented in the essay.

Reference Lists

Agnihotri, A. and Arora, S., 2019. Study of Linkages Between Outward Foreign Direct Investment (OFDI) and Domestic Economic Growth: an Indian Perspective.

Aguilar-Hernandez, G.A., Rodrigues, J.F.D. and Tukker, A., 2021. Macroeconomic, social and environmental impacts of a circular economy up to 2050: A meta-analysis of prospective studies. Journal of Cleaner Production, 278, p.123421.

Ahmad, N., Ribarsky, J. and Reinsdorf, M., 2017. Can potential mismeasurement of the digital economy explain the post-crisis slowdown in GDP and productivity growth?.

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Batten, S., 2018. Climate change and the macro-economy: a critical review.

Chipeta, C., Meyer, D.F. and Muzindutsi, P.F., 2017. The effect of exchange rate movements and economic growth on job creation.

de Souza Mendonca, A.K., Barni, G.D.A.C., Moro, M.F., Bornia, A.C., Kupek, E. and Fernandes, L., 2020. Hierarchical modeling of the 50 largest economies to verify the impact of GDP, population and renewable energy generation in CO2 emissions. Economics assignment Sustainable Production and Consumption, 22, pp.58-67.

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Ökten, N.Z., Okan, E.Y., Arslan, Ü. and Güngör, M.Ö., 2019. The effect of brand value on economic growth: A multinational analysis. European research on management and business economics, 25(1), pp.1-7.

Tee, E., Larbi, F. and Johnson, R., 2017. The Effect of foreign direct investment (FDI) on the Ghanaian economic growth. Journal of Business and Economic Development, 2(5), pp.240-246.

van Meijl, H., Tsiropoulos, I., Bartelings, H., Hoefnagels, R., Smeets, E., Tabeau, A. and Faaij, A., 2018. On the macro-economic impact of bioenergy and biochemicals–Introducing advanced bioeconomy sectors into an economic modelling framework with a case study for the Netherlands. Biomass and Bioenergy, 108, pp.381-397.

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