Question

Many reasons for why the United Kingdom voted to leave the European Union have been proposed. A common one is that imports from the EU hurt low-skilled British workers. Suppose that there are two industries, financial services and manufacturing. Further assume that there are two factors of production, low- skilled and high-skilled workers, and that finance is high-skill intensive and manufacturing is low-skill intensive. Further assume that the United Kingdom is abundant in high-skill labour.

Describe also how the relative output of financial services versus manufacturing in the UK changes with Brexit. Explain your answer.

Answer 1

For a very long period now there has been a fear of BREXIT. BREXIT in simple terms refers to Britain holding a referendum to decide whether it wants to continue membership under EU or not. The referendum was held on 23rd June 2016 and 52% voted for BREXIT whereas 48% voted for remaining within the EU. Although the referendum is not binding on the Britain’s parliament, the PM has announced that he has to respect the will of the people.

Major emphasis is related clearly on the financial sector. UK financial sector’s relevance to the rest of the EU is also pronounced. British banks lend nearly $1.4 trillion to EU companies and governments. Much of the financial activities carried out in Europe are either directly or indirectly performed out of London (87% of US investment banks’ EU staff are employed in London.

Britain is the Ninth largest manufacturing country in the world, but BREXIT would be serious in manufacturing sector. anticipating BREXIT British manufacturers have compiled raw materials & components which has led to medium & small sized manufacturers having low cash reserves. if UK adopts standards which are different from EU , then they might have to create two different versions of every product.

Tariffs and custom would be serious for many manufacturers relying on frictionless trade to source components and export goods , manufacturers would have to abandon entire product line if new tariffs make those product parts to import.