Impacts of 2012 Olympic Games on the London Economy

Q3. IMPACT OF THE SUMMER 2012 LONDON OLYMPIC GAMES ON THE UK ECONOMY

The summer 2012 Olympic Games to be held in London is expected to have both negative and positive impact to the East London and UK economy. In reference to other host countries in the past e.g. China, Sydney and Greece, hosting of the Olympic Games is dimmed to cause an increase in the country's GDP, increase in investments thus business development, creation of employment and trade and infrastructure improvement.

Economic growth due to increase of London's GDP from hosting the Olympic Games will act as an incentive to attract both local and foreign investors. Government investment in developing the country's infrastructure i.e. transportation and electricity will improve the business environment leading to increase in productivity and competitiveness mainly in the manufacturing industry thus attracting investors to enter the economy and boost further economic growth. For instance in the case of China, who invested nearly $40 billion in infrastructure for the preparation of the 2008 Olympic Games. This led to the improvements in the overall production conditions for domestic and foreign enterprises, making investment in Beijing more attractive.

Another impact is that there is a possibility there will be an increase of employment in London and surrounding neighbours due to increase of labour demand and mobility. This may be a long-term effect on the economy since there will be job opportunities from companies that expanded even after the games end. So far there has been a decrease in unemployment since 2009 due to increase of labour demand and supply in the construction industry. There will also be several short-term job creations most notably during the game period e.g. ticket selling, job opportunities in hotel and housing industry due to a large inflow of tourists. The wage rate may increase due high labour demand and mobility and this will result to increase of labour supply since citizens in the UK or EU will want to work in London and its neighbouring regions due to good wage rates.

Though most impacts of the Olympic Games to the host country are positive, there are some negative effects. Rise in national income and economic growth may lead to a possible increase in UK inflation rate before and during the games period. Increase of consumer aggregate demand due to increase in household incomes will cause a rise in inflation since there will be a rise in consumer expenditure. For example in the case of China, consumer price index increased even before the onset of the Olympic Games. Increase in government expenditure to further boost the economy may also cause rise in inflation rate. In order for the government to control the possible increase of inflation, they may be forced to revise their fiscal and monetary policies. To control consumer spending, the government may have to increase the bank interest rates so as to induce more saving than spending and reducing money supply by buying securities in the open market via the Bank of England. Increase of taxes will lower government expenditure, increasing GDP and lowering inflation.

In reference to China whose GDP increased due to increase of government spending and tourism income after hosting the 2008 Olympic Games, UK's GDP may also increase. Causes that may result to the increase of GDP in the country include government spending and increase of tourism income. Increase in government spending (investment in infrastructure), is a form of injection to the economy. Preparation of the Olympic increased government expenditure which will lead to an increase of those employed in households and firms who are used in the production of public goods and services. The firms in turn will use the income earned to invest in other businesses thus raising income and employment in the society. This will result to an increase in GDP. Another source of government revenue is the increase of tourism income. Due to the expected large flow of tourists before and during the game period, the GDP will rise since high tourists' expenditures will increase revenue hence boost the GDP.

London hosting of the games will cause deterioration in UK's balance of payment. Increase in public expenditure will increase interest rates and capital inflow which in turn will raise the demand for the sterling pound and therefore the exchange rate. Once the value of the pound increases, exports will become expensive and imports will become cheaper. This wouldn't be good for the economy since there will be a decrease in trade due to expensive exports. The government will have to consider fiscal policies that may be able to remedy the deterioration in balance of payment.

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