Readers Question. EVALUATE THE LIKELY ECONOMIC EFFECTS OF A FALL IN THE UK’S COMPETITIVENESS.
I know some points, such as deficit on current account, slower economics growth etc. However, I don’t know how to evaluate and write a conclusion on this one. Can you please help me?
This is definitely the more difficult part of the exam. I think most A2 students will find some of these ideas harder to think of in an exam. Some evaluation ideas could include
1. Lower economic Growth.
Lower competitiveness makes exports less attractive, therefore there will be a fall in exports causing lower economic growth.
- Economic Growth could still occur due to strong consumer demand. The UK’s manufacturing export sector has been decreasing in importance; now, it only contributes a relatively small % to the UK’s growth. In recent years, it has been consumer spending which has kept growth high (despite an increasing current account deficit)
- Does the fall in competitiveness extend to all sectors of the economy? Maybe the UK is losing competitivenes in manufacturing exports, but retains a competitive advantage in financial sector. Therefore, there is still room for growth from these other sectors.
- The fall in growth will effect some sectors and regions of the economy more than others.
Current Account Deficit
Lower competitiveness is likely to cause lower exports, higher imports and an increase in the current account deficit.
- Does a current account deficit matter these days? It is argued that due to globalisation capital flows are easy to attract. Therefore, a current account deficit is not a problem because the UK can attract sufficient short term and long term capital investment. (note this view on the current account is not shared by all economists.
- A fall in competitiveness will lead to a depreciation in the exchange rate. Therefore, the UK should retain its competitiveness through exchange rate changes. Therefore, although the current account deficit may get worse in the short term. In the long term the devaluation in the pound will help the current account deficit to get smaller again.
- Depends on elasticity of demand. If demand for UK exports is inelastic then a decline in competitiveness will only have a small fall in demand. If demand is elastic it will be much more serious. (Elasticity is always a good tool for evaluation purposes)
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