Economics Assignment: Socio-Economic and Political Factors of Brexit

This economics assignment analyzes the multifaceted impact of Brexit on international businesses within the United Kingdom, examining socio-economic and political factors. The essay delves into the effects of Brexit on the UK's currency value, inflation rates, and trade dynamics, exploring the challenges and opportunities for exporters and importers. It investigates the consequences of restricted immigration on the labor market and assesses the potential for new trade policies with non-EU countries. Furthermore, the assignment evaluates the impact on key business sectors, including financial services, automobile manufacturing, and food and beverage industries, considering factors like tariffs, foreign direct investment, and employment. The analysis includes discussions on the UK's contribution to the EU budget and its implications for the UK's economic performance, trade balance, and labor market fluctuations, ultimately assessing the advantages and disadvantages of Brexit from various economic perspectives.

Running head: ECONOMICS ASSIGNMENT
Economics Assignment
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1ECONOMICS ASSIGNMENT
In 2016, people of Britain have voted to withdraw the name of United Kingdom from
the European Union (EU). However, this step taken by Britain has raised questions regarding
the future of U.K among citizens of this country and among the world as well. In this context,
a brief discussion about the European Union can be beneficial for understanding the impact
of Brexit on international businesses of this concerned country. The EU is an international
organisation, contains 28 countries of the Europe (Kulik et al. 2018). Those countries have
followed some common policies regarding political, social and economical issues. This union
has come to exist after the Maastricht Treaty, which has been formed to enhance economical
and political integration of European countries through creating a common currency, that is,
the Euro. Hence, within this union, member countries have followed minimum trade
restrictions for exporting and importing products with each other. Other factors like people
and capital have also moved freely. However, the United Kingdom has taken decision to
withdraw its name from this union and this in turn has increased debates among people that
whether this decision is going to be good for the international businesses of this country or
not (Hartmann and Leug 2017). Hence, this essay has intended to focus on this issue by
analysing various external socio-economical and political factors related to Brexit.
After the referendum of Brexit, the U.K has experienced higher rate of inflation.
Moreover, the value of currency has also decreased significantly inter, of the U.S dollar. This
implies that, to exchange one unit of dollar, the country needs to pay higher amount of pound
compare to before (Caporale, Gil-Alana and Trani 2018). This in turn has led the real wage
rate of this country to decrease by large amount.

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Figure 1: Exchange rate of U.S. dollar for 1 unit of pound
Source: (Fred.stlouisfed.org, 2018)
According to above figure it can be said that the exchange rate of U.S dollar has
decreased after 2016. This implies that, to purchase 1 unit of pound less amount of U.S dollar
is required. This decreasing value of pound has generated inflation within the country. This
has affected exporters and importers in both positive and negative directions. Importers have
experienced loss due as they have paid higher amount of pound to purchase products from
foreign countries. this in turn has led the prices of imported products to increase further.
Consequently, the economy has experienced inflation within the economy. On the contrary,
exporters have experienced positive outcomes through this result (Steinwender 2018). In
foreign market, prices of exported commodities of U.K has decreased bay large amount and
this in turn has helped the country to increase the demand its exported output in international
market. After Brexit this situation can be seen by large amount. In addition to this, through
Brexit, immigration has been restricted. Consequently, people of other countries have left
Britain (Bootle et al. 2018). For this, teh country has experienced shortage of skilled workers.
This phenomenon has adversely affected the production system of this country. On the other
side, people of U.K, who have lived in other countries of the EU have started to come back in
their domestics country. As a result, the labour supply in U.K has increased by large amount.

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In this context, it can be said that the Brexit may help the U.K to implement new trade
policies for other non-European countries. For instance, the concerned country can
implement a free trade policy with some largest Asian countries and with the U.S as well. this
in turn can help the UK to promote its export and import relations toward a new direction.
However, according to some economists, this advantage may not fulfil the loss, which the
country is going to incur after Brexit. The EU is the largest neighbour market of this country.
Hence, a huge amount of products have been imported and exported within those countries
along with capital and labour. (Bagwell 2018). However, after Brexit, this amount may
decrease significantly. This is because, the UK may not utilise the common trade law of the
EU after withdrawal. Consequently, higher amount of tariff may influence the U.K to export
by small amount in those European countries. In this context, it can be mentioned that the
magnitude of U.K’s market in terms of GDP is small compare to the EU. As a result, the U.K
may experience less power to negotiate with the EU for tariff. Higher amount of tariff can
adversely affect the country to export more amounts of output in this market. For this, the
country can experience huge loss and this amount may not be compensated though trade with
other nations.
The concept of foreign direct investment (FDI) can also be considered in this context.
The country has received higher amount of FDI for being the member of the EU. The
financial services of the country have depended by huge amount on FDI. Under Brexit,
foreign financial institutions have operated their businesses in any part of the EU without any
restrictions (Liingston 2018). However, after withdrawal, foreign European bank may not
perform their business in Britain. This further can adversely affect the financial market of the
Australia by large extend.

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Under this situation, some important sectors of business can be considered. Those
sectors have employed huge number of employment and export products by large amount in
foreign market, especially in the EU.
Initially, it has been found that the financial services and insurance sector have
deployed nearly 3.6% of the labour force of the concerned nation. The financial services
sector has contributed 9.6% of the overall export of the nation, out of which exports
amounting to 41% are made to the EU. Moreover, there is significant contribution of the
insurance sector, which is nearly 4.3% of the overall UK exports (Bailey 2017). Out of this,
18% is exported to the EU. Hence, it could be cited that the insurance sector has occupied a
considerable position globally, which has assisted the related sector in minimising the level of
risk after Brexit. The financial services sector might find it difficult in negotiating a deal and
hence, there might be compulsion on the nation in choosing between a third country having
the status of WTO-style or it might stay in the form of a member in the single EU market
(Kenward 2016).
Secondly, Brexit would have significant effect on the automobile industry. This sector
has provided employment opportunity of nearly 0.42% of the nation’s total labour force,
which has helped in acquiring 4.9% of the total exports of the nation. Out of this market
share, 35% is exported to the EU. However, after the departure of UK from the EU market,
the car tariffs might rise by 10%; in case, the UK government does not negotiate deal with the
EU. If no negations are there between EU and UK, the rate of tariffs on the pharmaceuticals
and manufacturing sectors would rise by 4.6% (Ziv et al. 2018).
Thirdly, the manufacturing sector and capital goods sectors have generated 0.61%
opportunities of employment to the overall workforce of the nation and they own 8.6% of the
total export volume, from which 31% is exported to the EU. In the absence of trade
negotiation, there would be increase in the tariff rate to 4.5% from 1.7%. On the other hand,

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the impact would be significant on the tobacco and food and beverage industries in contrast
to the other sectors. The UK food sector has provided employment to 3.7% of the total
workforce having market share of 3.7% of the total exports of the nation, out of which 61% is
exported to the EU. If no negotiations are there between UK and EU, the processed food
tariff would rise by 15% (Schoenmaker 2017). In case of other products of the above-stated
sectors, the rate could be as high as 30%. Finally, it is to be borne in mind that the impact of
Brexit on the professional services sector would be significant as well and this necessitates
the need for the UK government to enter into trade agreements with the EU (Kreindler,
Gilbert and Zimbron 2016).
Based on the above evaluation, it could be cited that UK might encounter
complexities about the export of products and services to the EU after Brexit. Hence, for
overcoming the adverse trade implications, the nation would make trade agreement with the
biggest single market. In addition, greater tariff amounts could result in the export price
products by huge amounts. As a result, it would have negative repercussions on the UK
exporters for minimising the export amounts in this big single market because of the greater
prices of those industries after tariff imposition. Finally, this phenomenon could minimise the
employment opportunities of the nation.
Considering this, discussing the possible results of the Brexit from the perspective of
the international business of the UK, this essay will focus on various disadvantages and
advantages from the socio-economical as well as the political perspective of the business
sector (Dhingraet al. 2016).
People who have chosen Brexit have considered that leaving the EU can provide aid
to the concerned nation to lower their cost, which the nation has provided to the budget of the
EU. During 2016, total amount of the UK contribution has maintained at £8.5 billion.
Contrary to this, it is essential to compare this value of cost savings with the financial

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advantage with the free trade barriers that the country have gained as a member of the EU.
Net to this UK may lose its power of negotiation after Britain exit from the collaboration,
however it can establish trade agreement for different nation post the Brexit scenario
depending upon the requirement. In addition to this, concerned nation can have the change to
build up good political as well as social relationship with the countries and this in turn can aid
the UK economy to achieve significant amount positional profit around the world. On the
negative side, it can affect the investment portfolio of the nation adversely because there will
be fall on the market believe on the market as the Britain exit from the world’s largest and
long holding intern governmental cooperation.
Figure 2: UK budget contribution to EU
Source: (Sheldon 2016)
Considering the diagram 2, it can be seen that the contribution of the UK to the EU
budget has increased over the time significantly. Moreover, as the trend highlights during
2010 to 2015, budget contribution has increased largely and according to the estimation, the
budget share of the UK to the EU budget will rise by 14% by 2021 compared to the present
situation (Dhingraet al. 2016).

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Considering this economic discussion, different economic performance can be
perceived for the UK market. Initially the business flow of the UK can change drastically
after UK exit from the EU. It can lead to the fall in the business for the country, which will
further lead to fall in the exchange rate of the UK leading to change in the trade balance. Due
to the rise in the exchange rate of the UK compared to other nation, there will be fall in the
imports of the good while the export will be enhanced (Wadsworth et al. 2016). It will aid the
country to produce more volume of the importable good while the exportable goods will face
reduction in the production. It will affect the economy because, eventually lack of the
importable in the UK will cause the country to have fall in their trade balance due to the fall
in their trading. It will lead in the fluctuation in the labor market as well because some
product market will require higher number of labor which will cause rise in the price of the
wage in those sector and on the other hand there will be fall in the wage rate in the other
sector (Srovnalikova and Razinskaite 2017). It will lead to fall in the employment of one
sector, which is related to the exportable, and the sector related to the importable will face
boom.
To conclude it can be mentioned that the Brexit has considerable amount of debatable
outcome. UK may face positive outcome in the case of their international trade policies,
whereas the country can face fluctuation in their economy due to the fall in their trade
(Powdthaveeet al. 2017). There will be scope for the nation to build strong trade relationship
with the countries like china and USA and contrary to this, there will be less amount of
investment for the nation.

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