The Impact of BREXIT on Standard of Living in the UK
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Added on 2022-07-19
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In the document, we discuss the positive and negative effects of BREXIT on standards of living in the UK. How the economy changed the UK. The vote to leave the European Union was first approved by the United Kingdom. Brexit was an economically unparalleled event for both the European Union and the United Kingdom, and it ushered in a period of profound transformation for both organisations.
The Impact of BREXIT on Standard of Living in the UK
Added on 2022-07-19
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ESSAY
Topic: Using Economic Policy analysis, outline and evaluate the possible positive and
negative effects of BREXIT on standards of living in the UK.
Introduction
In June 2016, the United Kingdom first voted for partition from the European Union. Brexit
marked an era of massive change for both the European Union and the United Kingdom, and
it was an economically unprecedented event for both the EU and the UK. The UK is affected
in every aspect by its adverse exit from the European Union. Brexit has affected the UK in
terms of income, trade, tax barriers, and all the aspects that lead to a change in people's living
standards. In terms of trade, UK is the EU's largest trade partner. Members of the EU can
minimize trade costs and make products cheaper for consumers, and the businesses can earn
more by exporting more with low tax tariffs. The EU comprised 13% of the UK's national
income through trade. The Brexit deal has substantially affected UK's trade potential and the
businesses who had deals with all the EU member countries, services will be expensive now,
and trade barriers may arise. (Dhingra, n.d.)
The UK left the EU on 31st January 2020. On the other hand, Brexit provides a rare
opportunity to learn how a big economy adjusts by increasing trade barriers with its biggest
trade partner. Economists estimate long-term effects on income per capita in the UK, future
economic instability due to change in potential trade policies, economic policies, and their
effects on SMEs.
The most immediate effect after Brexit was a 10% decrease in the value of the British Pound
on a trade-weighted basis. This decrease directly affected consumer prices in the UK. It
affected people's living standards due to change in product costs, income per capita, trade
barriers, possible fewer exports for business, and expensive imported products. (Breinlich,
2020)
Topic: Using Economic Policy analysis, outline and evaluate the possible positive and
negative effects of BREXIT on standards of living in the UK.
Introduction
In June 2016, the United Kingdom first voted for partition from the European Union. Brexit
marked an era of massive change for both the European Union and the United Kingdom, and
it was an economically unprecedented event for both the EU and the UK. The UK is affected
in every aspect by its adverse exit from the European Union. Brexit has affected the UK in
terms of income, trade, tax barriers, and all the aspects that lead to a change in people's living
standards. In terms of trade, UK is the EU's largest trade partner. Members of the EU can
minimize trade costs and make products cheaper for consumers, and the businesses can earn
more by exporting more with low tax tariffs. The EU comprised 13% of the UK's national
income through trade. The Brexit deal has substantially affected UK's trade potential and the
businesses who had deals with all the EU member countries, services will be expensive now,
and trade barriers may arise. (Dhingra, n.d.)
The UK left the EU on 31st January 2020. On the other hand, Brexit provides a rare
opportunity to learn how a big economy adjusts by increasing trade barriers with its biggest
trade partner. Economists estimate long-term effects on income per capita in the UK, future
economic instability due to change in potential trade policies, economic policies, and their
effects on SMEs.
The most immediate effect after Brexit was a 10% decrease in the value of the British Pound
on a trade-weighted basis. This decrease directly affected consumer prices in the UK. It
affected people's living standards due to change in product costs, income per capita, trade
barriers, possible fewer exports for business, and expensive imported products. (Breinlich,
2020)
Effect of Inflation and Exchange Rate on Consumer Price Index
The import based pound FE rate depreciated by 10% right after referendum in 2016 by the
UK. The depreciation of the Pound Sterling is shown in the graph below:
Figure 1: The deprecation of Pound after 2016 Brexit Vote
Figure 1: The depreciation of the Pound after the 2016 Brexit Vote (Novy, 2020)
There are two main aspects of the sudden drop in the Pound's value; first, it was the most
sudden decrease of value in one of the biggest currencies of the world, and second, the
change was substantial for a big economy like the UK. The depreciation in the exchange rate
has led the UK consumer prices to increase by an estimated figure of 2.9%. As per living
standards, an annual increase of £870 in living costs for an average UK household. (Novy,
2020)
Exchange rates are significant because they directly affect the prices of relevant domestic
and foreign goods. Depreciation in a country's currency results in cheap prices of products
in foreign markets, and high prices of products in domestic markets. This directly affects the
businesses' and consumers' living standards. However, manufacturers can benefit from
selling their goods cheaper in foreign markets, making it less competitive.
The import based pound FE rate depreciated by 10% right after referendum in 2016 by the
UK. The depreciation of the Pound Sterling is shown in the graph below:
Figure 1: The deprecation of Pound after 2016 Brexit Vote
Figure 1: The depreciation of the Pound after the 2016 Brexit Vote (Novy, 2020)
There are two main aspects of the sudden drop in the Pound's value; first, it was the most
sudden decrease of value in one of the biggest currencies of the world, and second, the
change was substantial for a big economy like the UK. The depreciation in the exchange rate
has led the UK consumer prices to increase by an estimated figure of 2.9%. As per living
standards, an annual increase of £870 in living costs for an average UK household. (Novy,
2020)
Exchange rates are significant because they directly affect the prices of relevant domestic
and foreign goods. Depreciation in a country's currency results in cheap prices of products
in foreign markets, and high prices of products in domestic markets. This directly affects the
businesses' and consumers' living standards. However, manufacturers can benefit from
selling their goods cheaper in foreign markets, making it less competitive.
The UK had an import of £55 billion by the end of 2020. (Anon., 2021) According to
economists, exchange rate depreciation increases import prices. The following table figures
the change in prices for various spending categories as per an average UK household.
Table 1: Import Shares of 12 Spending Categories
Figure 2: Prices of Standard Spending (Novy, 2020)
According to the Standard Economic Theory, higher currency depreciation results in
substantial increase in inflation and import prices. The above table shows import
characteristics for 12 spending categories in both direct and indirect import shares of foreign
services used by domestic manufactures. The foreign product share for 'Clothing and
Footwear' is the highest, that means for each Pound the UK consumers spend, 49 pence are
spent towards the import of the product. In terms of services, the import share for education
is much lower. According to the hypothesis, the 'Clothing and Footwear' category is more
exposed to the depreciation in sterling. Hence consumers will observe a high price change in
this category. CPI inflation in the UK increased by 3.0% in September 2017. (Leromain,
2017).
According to analysts, possible negative economic effects of Brexit will be shaped by the
policies adopted by the UK. Low trade and less interaction with EU member countries will
damage the UK significantly. After the complete integration of the long-term effects of Brexit,
the reduced income per head may rise between 6.3% and 9.5%, around £6,100 annually.
economists, exchange rate depreciation increases import prices. The following table figures
the change in prices for various spending categories as per an average UK household.
Table 1: Import Shares of 12 Spending Categories
Figure 2: Prices of Standard Spending (Novy, 2020)
According to the Standard Economic Theory, higher currency depreciation results in
substantial increase in inflation and import prices. The above table shows import
characteristics for 12 spending categories in both direct and indirect import shares of foreign
services used by domestic manufactures. The foreign product share for 'Clothing and
Footwear' is the highest, that means for each Pound the UK consumers spend, 49 pence are
spent towards the import of the product. In terms of services, the import share for education
is much lower. According to the hypothesis, the 'Clothing and Footwear' category is more
exposed to the depreciation in sterling. Hence consumers will observe a high price change in
this category. CPI inflation in the UK increased by 3.0% in September 2017. (Leromain,
2017).
According to analysts, possible negative economic effects of Brexit will be shaped by the
policies adopted by the UK. Low trade and less interaction with EU member countries will
damage the UK significantly. After the complete integration of the long-term effects of Brexit,
the reduced income per head may rise between 6.3% and 9.5%, around £6,100 annually.
(Thomas, 2017) According to reports, the hardest-hit community is the middle-class
community of the UK, which suffered losses of about 4% in their real incomes (about £1,640
annually). Households of each income level have faced higher inflation; however, these
effects are different for different regions, like London households have suffered less than the
Welsh, Irish (North), and Scottish households. (Anon., 2017).
The uncertainty of Brexit would also affect the United Kingdom’s economic growth.
Estimated growth in UK will decrease by 6.7% in 15 years. (AMADEO, 2021). According to
theoretical models, UK households use foreign and local products and services, which makes
households exposed to the price changes in imports. Consumers are exposed to price
changes indirectly in foreign products as those products are used to manufacture local
products and services, such as clothing and footwear and restaurant items, as shown in the
table above.
Effects on SMEs
SMEs comprise 60% of the entire private sector and 99% of all UK employment. SMEs are an
essential part in the UK economy. Hence the damage to SMEs by Brexit directly affects the
economy and Britishers' living standards. SMEs are highly affected by the constraints of
Brexit given their limited resources and higher vulnerability to unprecedented damages. To
assess the damage to SMEs, different areas such as geographical location, industry, sector,
and sizes need to be measured. (Brown, 2019)
According to surveys, 32.9% of medium-sized SMEs report that Brexit is an obstacle to
success. Research suggests that sectors like food and catering, and services are more likely
to suffer than other sectors. Corporate sectors have more severe issues about Brexits damage
to their success potential. Effects on these sectors, directly and indirectly, affect the
household living in the UK; as the working and framework of the companies change, it
changes the consumer's behavior as well, affecting the household wholly.
Table 1: Brexit as a significant obstacle to the success of business in general (% of
SMEs).
Table 1: (Brown, 2019)
community of the UK, which suffered losses of about 4% in their real incomes (about £1,640
annually). Households of each income level have faced higher inflation; however, these
effects are different for different regions, like London households have suffered less than the
Welsh, Irish (North), and Scottish households. (Anon., 2017).
The uncertainty of Brexit would also affect the United Kingdom’s economic growth.
Estimated growth in UK will decrease by 6.7% in 15 years. (AMADEO, 2021). According to
theoretical models, UK households use foreign and local products and services, which makes
households exposed to the price changes in imports. Consumers are exposed to price
changes indirectly in foreign products as those products are used to manufacture local
products and services, such as clothing and footwear and restaurant items, as shown in the
table above.
Effects on SMEs
SMEs comprise 60% of the entire private sector and 99% of all UK employment. SMEs are an
essential part in the UK economy. Hence the damage to SMEs by Brexit directly affects the
economy and Britishers' living standards. SMEs are highly affected by the constraints of
Brexit given their limited resources and higher vulnerability to unprecedented damages. To
assess the damage to SMEs, different areas such as geographical location, industry, sector,
and sizes need to be measured. (Brown, 2019)
According to surveys, 32.9% of medium-sized SMEs report that Brexit is an obstacle to
success. Research suggests that sectors like food and catering, and services are more likely
to suffer than other sectors. Corporate sectors have more severe issues about Brexits damage
to their success potential. Effects on these sectors, directly and indirectly, affect the
household living in the UK; as the working and framework of the companies change, it
changes the consumer's behavior as well, affecting the household wholly.
Table 1: Brexit as a significant obstacle to the success of business in general (% of
SMEs).
Table 1: (Brown, 2019)
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