Assess the economic effects of Britain’s decision to leave the EU (25)
Time taken: 26 minutes
The UK’s decision to leave the EU in 2016 and subsequent exit from the EU in 2020 had two key effects on
the UK economy. Leaving this customs union meant that it no longer imposed a common external tariff on
members outside the EU leading to trade creation - moving from a high cost supplier within a trading bloc
to a low cost supplier outside the block. It also led to an increase in economy growth as government
spending increased as they no longer spent money contributing to the EU.
When in the EU, the Uk had a common external tariff on all countries outside the EU. This raised prices of
global goods significantly. Once the Uk left the Eu however, global prices decreased as the tariff was removed.
This led to a fall in import prices from World price + tariff to World price (a). The consequence of this trade
creation would be an increase in international competitiveness for the UK and export-led growth. A decrease
in the price of imported goods would lower the costs of production for UK firms because we tend to import
raw materials and goods required in the production process such as Steel because the UK does not specialise
in these productions. Consequently, these imports would become cheaper meaning that the main costs of
production would decrease leading to an increase in SRAS as firms can now produce more for the same
price as before. This results in lower prices of PL1 (b) increasing the international competitiveness of UK
exports as our exports would now appear relatively cheaper internationally and this would lead to an
increase in demand for exports. This increase in demand for exports would lead to an increase in the size of
the circular flow of income as exports are injections and consequently AD shifting outward as (x-m) would
increase, meaning that the UK has benefited from both an increase in international competitiveness and
export-led growth due to the trade creation.
A B
However, there is no guarantee that the UK’s imported goods will decrease in price. Gravity theory suggests
that countries trade with the other countries that are closest to them. This means that the UK may continue
to trade with the Eu as they are geographically closer to them then they are to e.g. USA. Consequently, they
will continue to import the same goods from the same countries resulting in no change to international
competitiveness and no export-led growth. Moreover, even if the UK found cheaper suppliers than within
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