Essay Example on The consequences after Brexit









The consequences after Brexit might be the following three options remain in the Single Market by joining Norway All sign free trade agreement with EU or trade under most favoured nation under WTO here after hard Brexit The purpose of this essay is to go in depth with the third option considered by the majority of macroeconomic studies the worst scenario in terms of trading opportunities GDP and income losses per head The application of the WTO rules implies the introduction of tariffs by the Single Market for goods and non tariff barriers for services mainly this could affect more the UK s services exporters which make up almost half of the UK total exports The UK government tried to quantify in its report the costs of this scenario especially in the long term horizon table n 1 Table 1 Annual impact of leaving the EU on the UK after 15 years difference from being in the EU Further analysis tried to quantity the impact of the hard Brexit under the WTO rules figuring out the range of GDP loss which may vary from 2 2 to 9 Having said that we can easily state that the hard Brexit will lead the UK to a decrease of the GPD in both short and long terms Taking advantage of what we have learned during the course we can demonstrate this loss in income and GPD through different models and concepts Model AS AD Aggregate Supply Aggregate Demand Chart 1 and Chart 2 First and foremost let's assume that UK economy starting point is A chart 1 

An increase of external tariff estimated at 4 5 bn sterling pounds2 would increase the prices through the higher price of imports upward shift of the AS short term curve The magnitude of the likely devaluation of sterling pound might make that shift larger Considering that the 27 other EU members accounts for 45 of the UK's exports it is very reasonable to see their decrease Some industries would be hit more than others and this might lead to an increase of level of unemployment and a decrease of real wage due to the inflation via imports Then consumption would be affected and would fall quickly along with the investments Businesses would likely respond to the uncertainty and disruption to their business models by postponing investment projects Higher financial risk premia would also increase the cost of capital reducing investment AD would shift to the left to the point C Chart 1 Model AS AD short and long run effects The higher cost of capital due to the uncertainty would cause a different level of capital stock The relation of this is explained in the chart 2 Chart 2 Capital stock and cost of capital ante and post Brexit The shift on the left side of the long term Aggregate Supply would depend on how much higher cost of capital would be due to the uncertainty and required premium risk If the rise in import prices led to significant upward pressure on inflation we can face a scenario where the inflation expectations could become less well anchored and the BOE in order to stabilise inflation and combat capital outflows would proceed to an increase of interest rates

A combination of the term premium pushing up government bond yields the increase in government debt due to higher automatic stabilizers provided by the government less taxes then could risk triggering a loss in fiscal credibility and the current and higher debt might be judged by investors to be unsustainable In the presence of such a risk fiscal policy would need to be tightened to retain policy credibility and investor confidence The difference between YAB e Yhard B is the loss of GDP 7 5 along with a loss of UK living standards table 2 pessimistic scenario and a higher level of inflation Phard B Table 2 the effects of Brexit on UK living Standards Let's take the Cobb Douglas production function to explain the structural shift of AS long term towards C Given 1 

Due to the higher cost of funds less FDI less income and less savings which means less investments K is going to decrease 2 L is going to decrease too because some industries particularly exposed to EU are going to fire people 3 Lower trade penalises UK consumers and corporates through higher prices and presence of barriers to get access to better good and service Lower trade doesn t also allow the UK to specialise in industries in which it has a comparative advantage aerospace and automotive 7 for instance Additionally the current level of UK productivity has been poor chart 3 and 4 4 TFP is going to be lower Chart 3 Output growth has been driven mainly by growth in hours worked rather than productivity Chart 4 Productivity has barely risen over the past decade The combination of those above might lead to a structural lower production function and to a new steady level after hard Brexit Chart 5 Chart 5 Likely steady state after hard Brexit

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