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Economic Policy analysis | BREXIT

Added on - 19 Jul 2022

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.

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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 forpartitionfrom the European Union.Brexit
marked an era ofmassive change for both the European Union and the United Kingdom,and
it was an economically unprecedented event for both the EU and the UK.TheUK is affected
in every aspect by its adverse exit from the European Union. Brexit has affectedthe 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 istheEU's largest trade partner. Members of the EU can
minimize trade costsand make products cheaper for consumers,and the businesses can earn
more by exporting more with low tax tariffs.The EUcomprised 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 mayarise.(Dhingra, n.d.)

The UK left the EU on 31stJanuary 2020.On the other hand, Brexitprovides a rare
opportunityto 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
effectson SMEs.

The most immediate effectafterBrexit was a 10% decrease in the value oftheBritish Pound
on a trade-weightedbasis.This decrease directly affected consumer prices intheUK. It
affectedpeople's living standardsdue to change in product costs, income per capita, trade
barriers, possiblefewerexports for business, andexpensive imported products.(Breinlich,
2020)
Effect of Inflation and Exchange Rate on Consumer Price Index
Theimport basedpoundFEratedepreciated by 10%rightafterreferendum in 2016bythe
UK. The depreciation ofthePound Sterling is shown in the graph below:

Figure 1: The deprecation of Pound after 2016 Brexit Vote

Figure1: The depreciation ofthePound afterthe2016 Brexit Vote(Novy, 2020)

There are two main aspects of the sudden drop in thePound's value;first, itwas the most
sudden decrease of value in one of the biggest currencies of theworld, and second, the
change wassubstantialfor a big economy like the UK. Thedepreciation intheexchange rate
has led theUK consumer prices to increase by an estimated figure of 2.9%. As per living
standards, anannualincrease of£870 in living costsfor an average UK household.(Novy,
2020)

Exchange ratesaresignificant because theydirectly affect the prices of relevant domestic
and foreign goods.Depreciation in a country's currencyresults in cheap prices of products
in foreign markets, and high prices ofproducts in domestic markets.This directly affects the
businesses'and consumers'living standards.However, manufacturers can benefit from
selling their goods cheaper in foreign markets,makingitless competitive.
The UK had an import of£55 billion by the end of 2020.(Anon., 2021)According to
economists, exchange rate depreciationincreasesimport prices.The following table figures
the change in prices forvarious spending categories as per an average UK household.

Table 1: Import Shares of 12 Spending Categories

Figure2: Prices of Standard Spending(Novy, 2020)

According to the StandardEconomicTheory,higher currencydepreciationresults in
substantialincreaseininflationandimportprices.Theabovetableshowsimport
characteristics for 12 spending categories in both direct and indirectimportsharesofforeign
services used by domestic manufactures.Theforeign productshare for'Clothing and
Footwear'isthe highest, that means foreachPoundtheUK consumers spend, 49 pence are
spent towards the importoftheproduct.In terms of services, the import share for education
ismuch lower. According to the hypothesis,the'Clothing and Footwear'category is more
exposed to thedepreciation insterling. Hence consumers will observe a high price change in
this category.CPI inflation intheUK increased by 3.0% inSeptember 2017.(Leromain,
2017).

According to analysts,possible negativeeconomiceffectsof Brexitwill be shaped by the
policies adopted by the UK.Low trade and lessinteraction withEUmembercountrieswill
damagethe UKsignificantly.After the complete integration ofthelong-term effects ofBrexit,
thereducedincome perheadmay rise between 6.3%and9.5%,around£6,100annually.
(Thomas, 2017)According to reports, the hardest-hitcommunity is themiddle-class
community oftheUK, 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 affectthe United Kingdom’seconomic growth.
Estimatedgrowthin UKwilldecreaseby 6.7% in 15 years.(AMADEO, 2021).According to
theoretical models,UKhouseholdsuseforeignandlocal productsand services, whichmakes
households exposed to the price changes in imports.Consumersare exposed to price
changesindirectlyinforeign productsasthoseproductsare usedtomanufacture local
productsand services, such as clothing and footwear and restaurant items, as shownin the
table above.

Effects onSMEs

SMEscomprise 60% of the entire private sector and 99% of all UK employment. SMEs are an
essentialpartinthe UK economy. Hence thedamagetoSMEs by Brexit directly affects the
economy and Britishers'living standards.SMEs are highly affected by the constraints of
Brexit given their limited resources andhigher vulnerability to unprecedented damages.To
assess the damage to SMEs, different areassuch asgeographical location,industry,sector,
and sizes need to be measured.(Brown, 2019)

According to surveys,32.9%ofmedium-sized SMEs reportthat Brexitis an obstacle to
success.Research suggests that sectors likefood and catering, andservices are more likely
to sufferthanother sectors.Corporatesectorshavemore severeissuesaboutBrexits 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 theconsumer's behavior as well, affectingthe household wholly.

Table 1: Brexit as asignificantobstacle to the success of business in general (% of
SMEs).

Table 1:(Brown, 2019)
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In Conclusion, the impact of Brexit on the UK's economy, labour market, and general standard of living is significant. Foreign goods are now more expensive in the UK for both consumers and producers as a result of the sudden decline in the exchange rate. Due to the inexpensive foreign market items that were produced as a result. UK manufacturers faced difficulties. people the rising import prices both directly and indirectly impact.