Evaluate The Likely Economic Effects Of A Fall
Auk’s Competitiveness If the Auk’s competitiveness falls it could be due to a number of price factors such as higher wages, increased inflation and non-price factors such as quality and after sales service. However, a fall in competitiveness will have some serious impacts on the UK economy. The first impact that a fall in competitiveness will have is the effect it will have on the current account of our balance of payments.
If the Auk’s competitiveness falls then the demand for our exports will decrease and domestic consumers are more likely to import foreign goods. This has a negative effect on the current account and if this is the case in the long run then we are likely to see a current account deficit. Running a current account deficit can be harmful if it is financed through borrowed credit as it can be unsustainable in the long run and countries will be faced with high interest payments.
Also a balance of payments deficit may cause a loss of confidence in the economy as the markets may view a country having a lack of control on their finances. The next affect that will come due to a loss of competitiveness and a
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The extent of this unemployment will obviously depend on a few factors like the state of the economy; as if confidence is high and the economy is growing then firms are less likely to fire workers, what sector is effected the most; for example some industries depend a lot more on exports and thus a fall in competitiveness will affect their business more than a company that has lot of domestic customers.
As the business cycle will show this is likely only to be a short-term problem and when our competitiveness increases again unemployment levels will decrease again. The third affect that a decrease in the Auk’s competitiveness will have is on the level of inflation. If competitiveness falls we will see a fall in exports and rise in imports as explained above and this will have an impact on the country’s aggregate demand. If imports are larger than exports this will put downward pressure on AD and thus will reduce the level of inflation.
We can see this on the diagram as AD will fall from DAD to DAD and subsequently price level will fall from PL to PL and also real output will fall from ROI to ROR. However, (X-M) isn’t a large part of aggregate demand so if imports are larger than exports then inflation will not be likely to fall by a very large amount. Other, more important factors, such as the level of consumption Evaluate The Likely Economic Effects Of A Fall In Auk’s Competitiveness By hugely 2 All fall in the Auk’s competitiveness is likely to affect the levels of FED into the I-J.
If the I-J export market is weak then international firms are less likely to invest in new projects and also the levels of investment form British firms is also likely to decrease. This has significant long-term impacts as it can reduce the level of aggregate supply as new technology will not be invested in and thus we will lose even more competitiveness. Also FED is a large actor in creating employment for example Ionians in Cumberland so if these levels of FED decrease we are also likely to see more unemployment in the long run.
This means governments have to introduce policies to invite foreign companies to invest in the I-J so that our competitiveness doesn’t decrease a recent example of this is a Chinese firm buying shares in Thames Water. So clearly there are significant impacts if the I-J competitiveness decreases and I believe the most significant effect is what it does to the levels of unemployment as we get demand deficient unemployment and then more unemployment due to lack of investment.
The second most significant factor is the effect it will have on our balance f payments as if competitiveness is low in the longhorn then we are likely to see a current account deficit, which will be financed by borrowing and will reduce confidence in the I-J economy. The third most significant factor is the effect it will have on inflation as (X-M) is only a small part of AD it isn’t likely to affect it by much. Finally the least important factor is the effect it will have on FED and domestic investment as firms are always looking to invest for the future and a fall in competitiveness may only be a short term phase.