Question

Brexit has led to the relocation of many multinational companies from the United Kingdom to continental Europe. This has in turn reduced the demand for real estate and many other local goods and services in the country on a long-term basis. What is the likely long-run impact of the change in the demand for local goods and services on the real exchange rate of the British pound?

Answer 1

Answer:
Brexit has led to the relocation of many multinational companies from the United Kingdom to continental Europe. This has in turn reduced the demand for real estate and many other local goods and services in the country on a long-term basis. The likely long-run impact of this in demand and exchange rate is mentioned below:

• As many companies have moved permanently from the United Kingdom to other European countries, net demand of real estates and many other local goods have decreased, because of this supply would be more than what is required, leading to decrease in prices of these goods to gain new equilibrium point.
• So prices of many goods will decrease which was higher earlier due to high demand.
• But the local supplier (multinational companies) which relocated outside have decreased the export volume of the United Kingdom as well, keeping import volume almost constant. This would lead to negative balance of trade and trade deficit to the United Kingdom.
• Because of trade deficit and negative balance of trade British pound will loose its value over long run.

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