Britain’s economy, such as higher import prices due

Britain’s
withdrawal from the European Union last June brought along several
disadvantages for the British economy, such as higher import prices due to its
weaker currency, resulting in imported inflation. Inflation is defined as a
persistent increase in the average price level (APL) in an economy.

In the first
three months of the year, the higher inflation reduced disposable incomes,
which is the amount of money that households have left for saving and spending
after income taxes have been deducted. Consumers have been one of the driving
forces of the economy in the past years, but if disposable incomes are reduced,
consumers have less money to spend on goods. If consumer confidence decreases,
consumption will also decrease as a result. Consumption (C) is one of the
components of aggregate demand (the total spending on goods and services in a
period of time at a given price level), as well as investment (I), government
spending (G) and net exports (X-M). Aggregate demand can be presented as a
formula (C + I + G + (X-M) containing these components. Therefore, if
consumption in an economy falls, the economic growth, which is an increase in
the real GDP, will eventually decrease. This situation is illustrated Figure 2 below, where the change in
income has caused a decrease in aggregate demand:

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