Economic environments for both economies

GDP is abbreviated for the term gross domestic product. The aim of GDP is to measure the income of a country and to check whether the economy is growing or contracting as figures are compared over 3 consecutive months. This 'economic health check' is then used as an influencing factor for the Bank of England when setting interest rates. The treasury will use GDP figures when setting out economic policy for example fiscal policy. GDP is also used internationally to compare how economies in different countries are doing. Countries with a higher GDP will tend to spend more than those with a lower GDP.

Generally the countries with the highest GDP are US, China, Japan and India. Demand for a product in these countries is huge and as GDP rises, so too does expenditure. According to the Office for National Statistics (ONS), GDP figures for UK in 2011 show a 0. 5% growth in the third quarter. During the last five years there hasn't been a huge change generally. Figures show there has been growth, mainly, except for between 2008 and 2009, which was the peak of the recession and the credit crunch, where figures show a huge decline of 2. 3%. India's GDP growth slowed to 6.9% in December 2011 according to figures from www. tradingeconomics. com/india.

During the past 5 years, the GDP rates fluctuated with a huge decline in 2008/2009 again due to the global credit crisis. In 2007, India's GDP growth rate was 9. 6% which was well above the current levels. Level of growth The level of economic growth is defined as "the increasing capacity of the economy to satisfy the needs and wants of goods and services of the members of society" (Wikipedia. org). Generally this measures the increase in demand for goods and the increase in supply for goods as a result.

However growth can also be due to the population growing or an introduction of new products and services. This will usually take figures from the GDP measure and analyse the reasons behind the economic growth from one quarter to the next or even the decline. Over the past 5 years, the UK economy experienced many fluctuations; generally the economy was steady or increased by a small percentage point. However in 2008-2009, the economy contracted, or shrunk as a result of the recession experienced at that time.

This could've been due to many reasons for example the output within the manufacturing sector slowing down or the output with the service sector slowing down. On the other hand, India's economy grew but at its slowest pace in two years. It appears that the rising interest rates in India coupled with the stumbling world economy is having an impact on the level of growth even in India. Rate of inflation Inflation is when there is a general rise in prices for goods and services. There are two main measures of inflation, the Consumer Prices Index (CPI) and the Retail Prices Index (RPI).

They both look at the prices of goods that are commonly bought including bread, cinema tickets and pints of beer. They will track how the prices of these poducts have changed over time. Te main difference between the two is simply that the RPI includes housing costs such as mortgage interest payments and council tax whereas the CPI does not. Inflation rates are expressed as percentages. IF CPI is 3% this means that on average, the price of products and services consumers buy is 3% higher than a year earlier.

In other words, consumers would need to spend 3% more to buy the same good or services they bought 12 months ago. The rate of inflation is a very important measure when setting economic policy. Again, the Bank of England uses it to set interest rates. If the MPC thinks that inflation will be above 2% in the next 18 months or so, they may decide to increase interest rates to try to bring it under control.

The rate of inflation currently in the UK is 5. 4% (RPI) and 5. 2% (CPI). Exactly 5 years ago these figures were 3. 7% (RPI) and 2.4% (CPI). This shows that there has been a general increase in the level of prices of good and services. However, figures show that within the 5 year period, there has been a general increase in prices using both measures, however, in 2009 the figures showed deflation. The rate of inflation in India is currently 10%. 5 years ago, the average inflation was 5. 79%. This shows inflation rates almost doubling in a 5 year period. This means consumers in India have to spend on average 10% extra in comparison to 12 months ago.

This causes a lot of other problems such as a decrease in consumer spending if customers can't afford to buy products. Interest rates Interest rates are usually referred to as the cost of borrowing money. They are normally expressed as a percentage and the borrower will pay that for the use of money that they have borrowed from a lender, for example for a mortgage or a loan. The Bank of England's monetary policy committee will set the interest rate and they would usually like to set interest rates to keep inflation low. Currently, the interest rate in the UK is 0.5%. This has been the case for the last 27 months in a row.

This downward trend in interest rates began during the credit crunch crisis in 2008 otherwise this was not the case prior to 2008. In 2006, the interest rates were on average 5%. This shows a significant change in the last 5 years. The reasons for cutting the interest rates were an attempt to boost the UK's economy. It was primarily to encourage people from borrowing money, and spending it into the economy while the economy is still earning money from the interest that people are paying on their borrowing.

According to Trading Economics, the interest rate in India was 7. 5% at the start of 2011, and 5 years ago (in 2006) was 5. 25%. The reason for the increase in interest rate seems to be to control the increasing inflation rate. If the Indian economy makes it harder for people to borrow money, then less consumer spending will take place and as a result this may curb inflation. Employment levels This measure is to do with the number of people who are able to work, in employment. A 0% rate of unemployment would mean that all people are employed and there isn't anyone who is able to and willing to work, not in employment.

A report published by The guardian newspaper on the 16th November claims that UK currently has the highest unemployment rate since 1994 with 2. 62 million people currently unemployed, or 8. 3% if expressed as a percentage. A report published in the Daily Mail in October 2011 also claimed that unemployment figures show a 'surge to their highest in 17 years'. The unemployment rate for India was last reported as 9. 4% according to www. tradingeconomics. com However, for the previous 5 years unemployment averaged at 7. 2%. This means that if the current trend was to continue, then unemployment would be on the increase.