One of the economic issues that have made headlines in the recent past is the June 2016 referendum in which the UK voted to leave the EU economic bloc. The arguments for the move have been diverse ranging from the fact that UK was contributing to the EU budget and was not getting reasonable returns from the same, to the fact that EU was more socialist which limited the ability by the UK to forge ahead with development projects (Dorling and Danny i3697). The debate has exposed various microeconomic principles in play especially regarding the impact Brexit would have to the prices of goods and labour in the two blocks.
One obvious outcome of Brexit is that the goods coming from the UK to the EU will face greater restrictions which could essentially lead to the prices of such goods in the EU market being expensive but all out of exorbitant taxation by the EU regulations as opposed to the UK reaping higher prices for their exports to the EU. This is a major hit to the UK noting that the EU accounts for up to half of the total UK’s exports.
The EU has had a prolonged advantage of huge bargaining power on all trade deals affecting other countries not in the EU such as Japan. By the UK exiting the EU, the likely consequence is that their individual bargaining power as well as that of the EU toward such countries as Japan shall go down which could cause them to get raw deals on major products (Dhingra, Swati and Thomas 3). The result is that in the two blocks, UK and EU, prices of these commodities are likely to go up and consequently lower the living standards of the citizens of the two nations.
Apart from prices, another micro economic principle that comes at play in regard to Brexit is the market efficiencies between the two blocks, United Kingdom and the European Union. Predictably, the EU shall tighten the tariffs and non-tariff trade barriers against the UK which would significantly reduce the volumes of trade between the two nations. The likely consequence of this is that the employment levels in the two nations would go down which in turn affects the consumers’ ability to purchase goods and services. The above has spill over effects in the economy namely inability by people to invest, and generally a lagged economic growth due to less expenditure on the part of most citizens. Tight trade barriers are also likely to affect remittances by UK nationals who serve in the EU nations. All of these are likely to cause a situation where the economy of the EU lags in growth noting that this economy contributes only a mere 18% in the EU budget (Dhingra, Swati, et al 12). The net effect of Brexit on the UK would be the net difference between the losses made by UK out of the Brexit against their savings of 18% of the total EU budget.
Another major advantage that the UK was enjoying while under the EU was the ability to specialize in various industries that it had comparative advantage over. This was made possible by the widened market that the residents and businesses from the UK could access in the EU. By Brexit, it means that the UK loses such advantage which could render the business people unable to export these goods to the EU essentially limiting the growth of the local industries, thus employment opportunities go down and also the ability by the local residents to purchase basic commodities (Crabb and Angelica 73).
Works cited
Crabb, Angelica. "Wine export: Impact of the'Brexit'on Australian wine exports." Wine & Viticulture Journal 31.3 (2016): 73.
Dhingra, Swati, and Thomas Sampson. "Life after Brexit: what are the UK’s options outside the European union?." (2016).
Dhingra, Swati, et al. "The consequences of Brexit for UK trade and living standards." (2016).
Dhingra, Swati, Gianmarco Ottaviano, and Thomas Sampson. "Should we stay or should we go? The economic consequences of leaving the EU." CEP Election Analysis Paper 22 (2015).
Dorling, Danny. "Brexit: the decision of a divided country." (2016): i3697.
Appendix
Figure 1: data showing trend in exports and imports between EU and UK over time
