Question

3. The United Kingdom (UK) held a national referendum (vote) on whether the UK should remain in the European Union (EU), or should exit the EU. Exiting the EU is likely to have several consequences: (1) increased barriers to trade between the UK and the remaining EU countries; (2) Reduced refugee flows.

Use the AS/AD model to describe the short run and long run effect of the UK exit from the EU.

Answer 1

1)Increased barriers to trade means UK will no longer be a member of EU and will not have trade agreement with EU.This will lead to elimination of Britain's tariff free trade status with other members of EU.Tariffs would increase the price of exports and exporters will be hurt as goods become costly in Europe.So pounds will become weak.All imports will go through customs and delays at the border will create food shortages in UK.

2)At the national level,reduced EU immigrants are likely to lead to lower living standards for the UK born.The reason for this may be that immigrants reduce the deficit . They work and pay taxes and make lesser use of public services as they are young as well as more educated than the UK born.Thus lower immigration will push living standard low.Tariffs will also increase prices of imports , create inflation and lower the living standards in UK.

The fig below shows the short term and long term effect in the AD/AS model.Short term effect is the negative shock to the economy from Brexit in the form of less investment and less demand.Long term effect is lower GDP in the long run.

सोमवार Monday ERAS AD GDP