There are going to be a lot of articles on protectionism (Trump) and access to markets (Brexit) coming up. The article below looks at whether free trade is good or bad. Handy points of evaluation to deploy on articles about trade that might be used for IA's.
Showing posts with label Brexit. Show all posts
Showing posts with label Brexit. Show all posts
Thursday, 19 January 2017
Friday, 22 July 2016
If you needed proof confidence is important, look no further than the UK
The decision of the UK to leave the European Union (EU) was widely predicted to be an economic disaster. Therefore we shouldn't be surprised that businesses and consumers have reacted to the move based on the uncertainty this situation has created.
A survey recently published survey shows there has been a sharp slowdown in orders, which will work through the economy to mean lower output. The slowdown is the worst since the Global Financial Crisis.
Both Consumption spending and Investment spending, both components of Aggregate Demand (AD) are partly determined by household and firms confidence (sentiment). Put simply if households are worried about future income they will spend less and save more now. Firms will not invest as much if they are uncertain about future prospects. Brexit has handed out one huge dollop of uncertainty and households and firms are reacting exactly as economic theory predicts.
The effect is to reduce both Consumer and Investment spending and AD will fall.
A survey recently published survey shows there has been a sharp slowdown in orders, which will work through the economy to mean lower output. The slowdown is the worst since the Global Financial Crisis.
Both Consumption spending and Investment spending, both components of Aggregate Demand (AD) are partly determined by household and firms confidence (sentiment). Put simply if households are worried about future income they will spend less and save more now. Firms will not invest as much if they are uncertain about future prospects. Brexit has handed out one huge dollop of uncertainty and households and firms are reacting exactly as economic theory predicts.
The effect is to reduce both Consumer and Investment spending and AD will fall.
The diagram shows the result of a fall in business and consumer confidence. Inflationary pressure is reduced and this may well lead to the Bank of England having to cut interest rates and engage in more quantitative easing as the UK inflation rate is already well below target. Also with lower output UK economic growth will falter and the possibility of recession and higher unemployment will mean the government might have to allow the budget deficit to increase.
The Bank of England has already indicated that they will take an accommodating stance and the new British Chancellor (Treasury minister) has said the aim of returning the government budget to balance by 2020 will be abandoned.
VCE students can use this to apply their knowledge of budgetary policy and note the link to monetary policy for the 'policy mix'. For IB students this is an excellent example of fiscal and monetary policy operation using the AD/AS model to analyze the consequences and responses. Not that there will be both discretionary and automatic responses from fiscal policy.
Monday, 27 June 2016
After Brexit what next for Britain's trade
After the (disastrous) result of the UK's vote to exit from the EU a good question is what trade arrangements can be made for the future.
The EU operates a 'single market'. There are no restrictions on the movement of goods, services, people or money. This is a completely 'free trade area' and the countries that operate with the Euro as their currency also eliminate any exchange rate transaction costs.
The UK sends about half it's exports of goods to the EU. The services sector is the crucial one however, with the City of London (the financial sector) easily the most important single part of the UK economy.
The UK now finds itself back at the basic level of trying to negotiate trade deals with the EU and replace all the trade deals that cease to exist with the rest of the world when leaving the EU.
There are a hierarchy of arrangements, from simple bilateral 'concession deals' with individual countries, to Free Trade Areas (which cover goods not services) right up to full access to the EU's single market (but at a cost).
The BBC sets out five alternative new models for the UK/EU trading relationship. It is rare to have the chance to pick where on the ladder of trade agreements you will sit. The pro's and cons of each arrangement need to be carefully considered.
What is clear is that none of the five options the BBC outline will prove acceptable to those who voted 'Leave' in the British referendum and simultaneously protect the UK's vital services sector. I hate to say 'I told you so', Brexiters.
The EU operates a 'single market'. There are no restrictions on the movement of goods, services, people or money. This is a completely 'free trade area' and the countries that operate with the Euro as their currency also eliminate any exchange rate transaction costs.
The UK sends about half it's exports of goods to the EU. The services sector is the crucial one however, with the City of London (the financial sector) easily the most important single part of the UK economy.
The UK now finds itself back at the basic level of trying to negotiate trade deals with the EU and replace all the trade deals that cease to exist with the rest of the world when leaving the EU.
There are a hierarchy of arrangements, from simple bilateral 'concession deals' with individual countries, to Free Trade Areas (which cover goods not services) right up to full access to the EU's single market (but at a cost).
The BBC sets out five alternative new models for the UK/EU trading relationship. It is rare to have the chance to pick where on the ladder of trade agreements you will sit. The pro's and cons of each arrangement need to be carefully considered.
What is clear is that none of the five options the BBC outline will prove acceptable to those who voted 'Leave' in the British referendum and simultaneously protect the UK's vital services sector. I hate to say 'I told you so', Brexiters.
This article has relevance to both IB and VCE. VCE students can apply it to the deals made by Australia in recent years and the TPP proposal to look at their pros and cons. For IB the article is essential reading, partly for the theory and application, but mainly because this is exactly the sort of thing you would set questions about in Paper 2!
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