SRJC_H2_ECONS_P1_CSQ2_Suggested_Answers

1 ©SRJC 9757/01/Prelims/2018 SRJC H2 CSQ 2 Suggested Answers (a) With reference to Figure 2, compare the UK’s trade in goods with trade in services over the period. [2] • trade in goods is in deficit whereas trade in services is in surplus • both shows an increasing trend i.e, deficit is getting bigger whereas the surplus for trade in services is getting larger (b) Explain one possible cost and benefit to the UK economy of its exit from the EU. Assess whether they are likely to occur. [8] Possible cost: 1) Fall in economic growth due to fall in AD • As a member of a custom union, UK exports to the EU are not subjected to tariffs • But now that it exited the custom union, this privilege is withdrawn. UK goods are taxed or subjected to other protectionist measures when sold in the EU as well as in other countries that EU has signed FTAs. Analysis • A tariff increases the price of UK exports to the EU and other non-EU countries  reduces UK export competitiveness  demand for UK goods likely to be price elastic as there are many substitutes in the EU market  qty demanded falls by more than proportionately  export revenue falls • UK will be a less attractive destination for inflow of FDI. Many foreign firms locate production in UK to take advantage of the large EU market but now their exports will be affected by tariffs making their investments less profitable. In addition, cost of production would increase as UK too will impose tariffs on imports raw materials from the EU. This further makes UK exports less competitive. • Due to the uncertainties with regard to the profitably of firms and the ability to continue to work in the EU, households may cut back on consumption as there is fear of loss of jobs. • So with fall in C, I and X, AD falls and this will cause economic growth to fall. Other costs 2) Higher unemployment • There could possibly be a rise in demand-deficient unemployment. So when AD falls, firms will retrench workers to cut costs since firms are faced with increase unsold stocks. There is no need to hire additional workers since the demand for workers is a derived demand and the demand for goods has fallen. Over 3 million jobs are linked to exports to the EU and some of these workers will be unemployed. • In addition, there may be increase in capital outflow due to the uncertainties linked to Brexit. As firms relocate to other countries, more workers will be unemployed. OR 3) higher inflation rates Possible Benefits 1) Higher economic growth due to increase in exports and increase in Govt spending • After exiting the EU, UK need not contribute to the EU  money saved can be used for domestic spending  increase in G  increase AD

2 ©SRJC 9757/01/Prelims/2018 • Being in the EU, UK cannot sign FTA with other non-EU member countries on its own which restricts her ability to increase trade further • But after Brexit, UK can choose to