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.

a) Show using the Heckscher-Ohlin model of international trade how relative wages for low-skilled and high-skilled workers are determined when the UK is a member of the EU (i.e. when there is free trade between the UK and the rest of the EU). Explain your answer.

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

Answer 1

Answer;

(a).

• Now there are two countries UK and the rest of EU let’s assume EU is another country used for the sake of simplicity and two factors of production HIGH SKILLED labour and low skilled labour.

1. UK is abundant in high skilled labour
2. EU is abundant in low skilled labour

• Two industries financial services which is high skill intensive and manufacturing which is low skill intensive.
• Heckscher-Ohlin mode of international trade states that a country exports a good which is relatively intensive in factor of production that is relatively abundant in that country so UK would import manufacturing and export financial services.
• As a result wages of low skilled labour would decrease in UK for the country imports manufacturing from the EU which is advantage in production of low skill intensive goods and services.
• then relative wages of high skilled labour would increase as it has another market for financial services outside of UK is the rest of EU.

(b).

• Considered for a very long period now there has been a fear of BREXIT.
• BREXIT in simple terms states 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.
• While 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 sectors relevance to the rest of the EU is also pronounced. British banks development approximately $1.4 trillion to EU companies and governments.
• Much of the financial activities carried out in Europe are also 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 , before 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.