Vanessa Begovic 3.

P
Niels Brock DIG, 2023

International Economy A
Great Britain’s Economy & Trade

Assignment 1

a) Based on appendix 1, calculate shares of Great Britain’s trade in 2018 and

account for which countries that are the most important trading partners.

It is very important for Great Britain to maintain a stable relationship between imports and
exports. This is because it can easily affect factors such as the country’s GDP, inflation, and
exchange rate. Currently, Britain’s balance of trade is negative, as they import more than they
export. In 2018, Great Britain’s total exports accounted for $490.840.364 USD, and their
imports accounted for $671.694.258 USD.
In order to calculate the exact BOP for Great Britain, you subtract imports from exports.
$ 490.840 .364−$ 671.694 .258=−$ 180.853 .894 USD
This, therefore, leaves us with a negative BOP and thus, a trade deficit in the country.
However, to find the most important trading partners it is crucial to look into how much a
particular country, Great Britain trades with, constitutes to their total export and import.
To calculate the following we must divide Great Britain's export/imports by the desired
country’s export/imports, and later divide the found number by 100. Hereby we will find the
export/import of the country as a percentage of Great Britain’s total export and import. The
following example shows the calculation of how much the USA exports and imports with
Great Britain.

Export=( $$490.840 .364 )

65.985 .305
∗100=13 , 4 % of GB’s total export

Import=(
$ 671.694 .258 )
$ 63.294 .166
∗100=9 , 4 % of GB’s total import

The other numbers for the countries listed in Appendix 1, can be found in the table below.
Country/region Exports Imports
USA 13,4 9,4
Germany 9,7 13,7
The Netherlands 7 8,3
France 6,5 5,6
Ireland 5,8 2,7

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China 5,6 9,4
Switzerland 5,2 1,1
Belgium 3,9 5,2
Spain 2,8 3,1
Canada 1,5 2
India 1,3 1,4
EU (27) 46,4 53

We can now look into which countries Great Britain has a trade surplus with, meaning that
they export more than they import from that country. According to the found numbers, Great
Britain is shown to have a positive trade balance with the USA, France, Ireland, and
Switzerland.
The following countries can be considered good trading partners as they all contribute
positively to Great Britain’s economy. For instance, imports from Switzerland contribute to
1,1 percent of GB’s total exports which is negative for their economy, however, GB’s exports
to the country are approximately 5.2 percent, which therefore has a greater impact on the
overall economy.

However, looking from a more general perspective, all the listed countries can be important
trade partners for Great Britain. While the previously calculated BOP for GB shows that the
country has a trade deficit, some goods, and services are not possible to produce, and are thus
crucial to import from elsewhere. In this connection, it can be important to mention that some
countries have a comparative or absolute advantage in producing some products, making it
more efficient to import from them. The table above shows that the EU is a big and most
likely important trading partner for Great Britain. Primarily countries like Germany and the
Netherlands, which are mentioned separately, both constitute big percentages of GB’s total
export and imports.

b) Based on appendices 2, 3 and 4, explain the development of the British price

competitiveness.
Britain has for a long time had a growing average labor cost. Since 2015, it has increased by
approximately 3,8 percentage points, which is a little bit less than the OECD countries.
The labor cost and productivity are together with the country’s GDP and valuta course,

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crucial for their price competitiveness. Looking further into the growing labor cost from
Appendix 2, it is noticeable how it has been developing in the 10-year period from 2009 to
2019. Here we can see that the labor cost for Great Britain was quite stagnating in the first
years from 2010-2012, this is positive for GB’s price competitiveness as lower wages tend to
decrease the overall production costs. This is due to the employers having to pay less of their
profit to employees, and they thereby can produce and sell products cheaper, giving the
country a competitive advantage. However, the graph also shows that the average labor cost
for Great Britain has been increasing drastically since 2012. As previously mentioned, it has
increased by circa 3,8 percent, since the base year in 2015. While this is still a smaller growth
than for the OECD, Great Britain’s price competitiveness has deteriorated compared to the
decreasing period from 2010-2012.

Looking into Appendix 3 which shows us the indexed GDP per hour in GB and the OECD,
we can assume that it portrays the effectiveness and productivity of the various countries.
The Graph shows us that Great Britain overall has seen an increase in GDP per hour,
however, with a few extraordinary periods of growth or deterioration. For instance, it
decreased in 2012, impacting the economy negatively, while it increased drastically in 2015,
impacting the economy and productivity positively, as it means that the workforce has gotten
more effective. This thus most likely results in higher efficiency when producing goods, and
in the end lower prices, which are more competitive in the international markets.

Compared to the OECD, Great Britain has seen less growth, impacting their price
competitiveness negatively. For the OECD it looks like they will keep growing excessively as
they have done since 2009. This will therefore make it more attractive for other countries to
trade with the OECD rather than Great Britain, impairing their price competition ability.
However, in this connection, it is important to note that it is hard to compare GB to the
OECD, which is an organization consisting of many countries. Additionally, we do not know
whether the ’base year’ in 2015 is the same numbers for GB and the OECD, making them
hard to compare to each other in both Appendix 2 and 3.

Last, looking at Appendix 4 we can see the valuta course, and thereby the price of 1 euro in
pounds. In December 2020 one euro cost 0,9 pounds, meaning that the pound was stronger
than the euro. Through the 11-year period, the pound has overall appreciated, meaning that

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you have to pay fewer pounds to get a euro. Comparing the price in 2009, which was
approximately 0,95 pounds, to the price in 2020, which was 0,9, we can see how it overall
has appreciated by 0,05. A major appreciation is also seen in the years 2014-2016, where it
hit the lowest point of 0,7. This is in general bad for British price competitiveness, as it
makes their products more expensive internationally. However, after 2016, the price
depreciates again and becomes somewhat stable, and equal to previously. This thus, makes it
more attractive to trade with Britain and their price competitiveness has thereby also become
stronger again.

c) In appendix 5, it says that “… for the first time in the history of the EU, the
trading bloc has entered into a large gold-plated international agreement that
provides poorer conditions for trade and cooperation”. Thus, this agreement
does not guarantee trade completely free from trade barriers. Explain the pros
and cons for Great Britain of this agreement.

According to Appendix 5, the UK has finally reached an agreement with the EU

regarding their future relationship. As a result of Brexit, the two parties are trying to find a
solution, in order to prevent a chaotic ‘no-deal’ situation. This has, however, become a lot
more complex than many thought. While it has had many consequences for the citizens and
the country’s infrastructure, the UK’s trade is suffering badly.
As previously identified in Appendix 1, the EU is UK’s biggest trading partner, and they
have, therefore, suffered severely on that front. According to Appendix 5, the agreement
allows for free trade but is not completely free from barriers, as there will be custom papers
to fill out and safety checks on goods entering Great Britain from the EU. On the other hand,
the trade between the UK and the EU will be free from taxes and customs, which is an
advantage in terms of price competition for Both parties. Especially, because their products
would be a lot more expensive for citizens, which would lead exports to decrease. Therefore,
it is a big pro for Great Britain, that no taxes or customs are involved in the agreement.
However, free movement is according to Appendix 5, only available for goods produced
within Great Britain, with materials from the country. This thus means that many products
with foreign components will be charged with customs, worsening their price
competitiveness.

Furthermore, the fact that the citizens of Great Britain now have more restrictions on free
movement, can be very harsh on the population. According to Appendix 5, GB is

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discontinuing the right to live, work or study freely in the EU. This may sound very negative,
but for the government, this is a really smart way to keep the British workforce in the
country. If it becomes harder for them to freely move to another EU country like France to
work, they will most likely stay in Britain and thereby benefit the state. At the same time, GB
would have a better control over what foreigners they will allow into the country for work
purposes.

There will also be barriers imposed on the fishing sector, limiting international fishers from
e.g., Denmark to fishing in British waters. While that is a big advantage for the British
fishermen, it will most likely lead to no competition with selling fish in the country, affecting
the entire sector, and most likely causing job losses. This would be due to fish becoming
widely available across the country, pushing prices down with supply increasing. Other
sectors such as the agricultural sector in GB will according to Appendix 5 suffer. This is
because some British agricultural products such as potatoes will be banned from the EU. This
will thus hit the sector economically.

Assignment 2.1

Based on appendix 6, analyze Great Britain’s economy in 2020. Also, determine

which factors that contributed the most to the recession.

Looking into Appendix 6, we can see how the British GDP and other key indicators have
developed over the course of three years, from 2017-2019. We simultaneously see the
estimated figures for 2020, 2021, and 2022, which helps us identify what direction the
country is headed.

We can first assess the main components of GDP by the following formula:
GDP = C + I + G + (X-M)
Its main components are consumption, investments, government spending, exports, and
imports. A country’s GDP is the value of all final goods and services produced in an
economy in a year. This thus means that a change in one of the above-mentioned factors will
be keen to influence the entire GDP of Great Britain.
The table below shows recent growth and the estimated growth from 2017-2022, within the
aggregate expenditure equation.

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Looking into the numbers, we see how their GDP in 2020 is estimated to decrease by 11,2
percent, which most likely will be due to the covid-19 pandemic. It is, however, estimated to
increase by 4,2 percent in 2021, and a further 4,1 percent in 2022, which can be a sign of an
approximate quick recovery. Due to the rapid increase in the country’s GDP, the citizen's
living standards will increase, and they will have more money to spend. As a result, GB’s
household consumption is estimated to increase by 5 percent in 2022. The increase can also
have a connection to the rise in the average labor cost, as seen in Appendix 2. However, it
looks like household consumption will fall by 14,6 percent in 2020, it is primarily due to the
uncertainty of the covid-19 pandemic, which has led many households to save their money.
Simultaneously, a huge increase of 19,4 percent is seen in household savings in 2020. We can
assume that these two factors thus, have a connection to each other. Furthermore, a rise in the
unemployment rate is estimated, which can also have contributed to the expected fall in
household consumption in 2020. The unemployment rate will increase by 4,6 percent in
2020. While household consumption, GDP, and many other components may have decreased
in 2020, it looks like most of the numbers are estimated to be ‘back on track’ after the
pandemic.

Additionally, government consumption is also estimated to decrease by 9,4 percent in 2020

and later estimated to increase by respectively 6,4 percent in 2021. This can be a sign of more
investments from the government, in order to increase demand for goods and services after
the tough pandemic with a little spending. This is also seen through the estimated growth of
the general government debt, in the following years.
In this connection, the Appendix also shows a major decrease in investments in 2020, which
is a natural effect of the uncertainty created during the pandemic. A total decrease of 12,2
percent is expected, which is more than the decrease in stock building, which only will

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decline by 0,5 percent in 2020. Another reason for the generally slow growth in stock
building can be the relatively low short-run interest rate, making it less attractive to invest.

Further looking into Great Britain’s export and import, we can see that both are expected to
fall. Export is estimated to decrease by 13,1 percent, while imports will decrease by 21
percent. This major decrease is most likely also a result of covid-19. Many international
borders were closed during the pandemic, making trade a lot more complicated and harder to
pursue. However, it can be seen as positive for GB, that their imports have decreased more
than their exports since it means that more money is flowing into the country than out of the
country. One of the primary reasons for the fall in imports is due to the previously identified
fall in household consumption.
With a decreased GDP, an increased unemployment rate, and less money in hand, people are
also buying fewer domestic and foreign products, pushing imports down.
Great Britain’s export has therefore also seen a decline, as foreign customers most likely are
experiencing the same problems as GB’s citizens.

Lastly, assessing which factors contributed the most to the recession, we can from the
numbers see that household consumption is the biggest component pound-wise in 2017.
Since it experienced a major fall in 2020, by approximately 14,6 percent, it is most likely
contributing to the recession. The total fall in private consumption is £198,8 billion pounds,
which contributed negatively to the GDP. However, it was not the only factor contributing to
this. Looking at the numbers, we can see factors such as export and government consumption
both had a play in the following recession. Exports fell by circa £85 billion pounds and
Government consumption by approximately £37,6 billion pounds.

Assignment 2.2

a) As shown in appendix 6, British savings have increased from 6,5 % in 2019 to

19,4 % in 2020 and the same level is expected in 2021. Based on appendix 7,
asses why the Brits save so much in 2021. Include factors that affect savings
in your assessment.

Great Britain’s household saving ratio is expected to boom in 2020, as a result of the covid-
19 crisis. As seen in Appendix 6, this development will keep the same track throughout the
next few years. Like previously mentioned, the pandemic has caused major uncertainty in
investments, and it looks like this trend will not go back to normal any time soon. One of the
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reasons for the following could be the increase in income levels, as seen in Appendix 2. This
means that households have gained a higher disposable income, and thus, have the ability to
save more. The GDP is estimated to grow by 4,2 percent in 2021, meaning that Great Britain
will see relative economic growth.

As seen in Appendix 7, it is especially the high-income employed, who increased savings

during the Covid crisis. This may have a connection to the decrease in investments, as people
of higher income typically also have more money to invest. Since they didn’t have the
opportunity or will to do the following during the lockdown, approximately 42 percent of
high-income households saved more money. Furthermore, a majority of the middle-income
employed also saved more money. According to Appendix 7, around 33 percent of the
household increased savings. While this may also have a connection to the uncertainty of
investing, other factors such as worldwide lockdowns could specifically have contributed to a
general rise in savings, due to limited access to restaurants, cafes, amusement parks, etc.
At the same time, Appendix 6 shows us that consumer prices generally have increased over
the past few years. This can, for instance, be due to inflation, which many countries have
experienced as a result of the crisis. High inflation can encourage saving, as it creates
uncertainty and can discourage consumers from taking financial risks.

Meanwhile, a big number of low-income employed, unemployed, and furloughed have been
forced to spend their savings during the crisis. This is most likely due to their generally bad
financial situation, which has been affected by inflation, and the rise in consumer prices.
Especially because many of the primary and parts of secondary jobs are under lockdown
during covid-19. The Brits, therefore, may be scared to lose their jobs as a result of the crisis.
The uncertain future can thus be one of the primary reasons for the drastic increase in
household savings. We can also from Appendix 6 see that the unemployment rate will
increase by 7,4 percent, which has a connection to the above-mentioned. British citizens who
have or will lose their jobs are under the category ‘furloughed’, and we can see that they
especially spend their savings. However, it looks like the government will help the most hit
sectors with economic aid packs, which is also seen by the drastic increase in general
government debt from 2020-2021. It will increase from 145,3 in 2020 to 157,4 in 2021.

Last, the retired are amongst the group who saved the most during covid 19. This can be
assumed to have a clear connection to the major lockdowns and health threats they were
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facing. Retired typically spend money on traveling, eating out, as well as other experiences,
witch unfortunately during covid-19 was not possible. With many staying at home, they were
not able to spend their money and thus forced to save as seen in Appendix 7.

b) “Helicopter money is simply money thrown at consumers in the hope that the
economy will set off”. This quote is from appendix 8.
Based on appendices 8 and 9, discuss pros and cons of the economic policy
conducted by the British government to counter the crisis. Include the
concept of helicopter money. You could use the AD/AS model in appendix 10
in your discussion.

During the covid-19 crisis, British prime minister Boris Johnson decided to pursue an
unconventional expansionary fiscal policy, where he pushed large amounts of money into
British society. This was the main implemented government policy, in order to trigger
economic growth during the recession. The term ‘Helicopter money’ is in this connection
used by, at the time, minister of finance Norman Lamont, who states that it is simply extra
money thrown at consumers to increase spending amongst them. As a result of the harsh
policy, the government is now experiencing massive debt and a huge gap in its treasury
coffers. According to Appendix 8, the ‘bills’ have so far been paid by the central bank and
the Bank of England through printing electronic money, as a way of buying government
bonds. While this may help the government to maintain low-interest rates, the uncertainty
created during the crisis has discouraged spending, and encouraged savings, as seen in
Appendix 7.

Further assessing the government’s goal with the following policy, we can from Appendix 8
identify that they have continued wage compensation, reduced VAT on tourist activities,
removed stamp duty for property sales, and given financial support for the cultural sector in
terms of money for eating out. With economic aid for all of the above-mentioned factors,
Great Britain is hoping to boost economic growth drastically after covid. According to
Appendix 9, the government has so far spent 39 billion pounds on financial aid packages.
However, this policy has not only increased government debt but also decreased its earnings,
which is seen in the massive fall in GDP. From a government perspective, they are trying to
increase demand, and thereby also decrease unemployment, as production will increase with
a rise in demand. We know from Appendix 6 that an increase in unemployment is expected in
both 2020 and 2021, and Appendix 8 shows that the total number of furloughed Brits

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accounts for 18 percent of the total workforce. This is, therefore, a positive result of the
policy, as unemployment most likely would have been much higher.
Nevertheless, the numbers in 2020 show that Great Britain will experience a huge fall in
demand and thus in production as well. The covid-19 crisis brought uncertainty, as well as a
fall in general demand worldwide, leading to a fall in both exports and imports.
As seen in Appendix 10, the graph can help us illustrate the following correlation.
While price levels are increasing, GB’s GDP is decreasing, pushing the aggregate demand
downwards, creating a new equilibrium at a decreased GDP. Generally, the expansionary
fiscal policy aims at preventing demand from decreasing and thus also a lower production,
GDP, and unemployment. It can, therefore, in this connection be positive to pursue.

While this policy has many positive effects it is keen to increase inflation in the long run in
Great Britain, as more money is pumped out into the society. The forced increase in demand
will lead to a demand for jobs and thus push wages up. In this connection, British price
competitiveness is likely to worsen, as it becomes more expensive to produce goods and
services. Furthermore, this inflation can cause an increase in interest rates, as the central bank
will try to keep control of inflation. When inflation increases, banks will typically try to
encourage citizens to spend less and save more.

Another consequence of the policy can also be that it is extremely expensive and harsh on the
government, as they collect more debt that has to be paid off later. According to Appendix 9,
the government debt will surpass 100 percent of the country’s GDP. This is also seen in
Appendix 6, which shows that the general government debt is expected to be 145,3 in 2020
and 157,4 in 2021. The following most likely has a connection to the implemented
expansionary fiscal policy.

However, the long and intense covid-19 crisis has also changed consumer patterns. The world
has become a lot more technology-oriented, and online shopping has become a normal part of
our everyday life. Appendix 9 shows that more than 25 percent of all restaurants and pubs
have been threatened to close as a result of the harsh crisis. Not only these, but the entire
service sector has been majorly impacted by the following. This may therefore have led many
financial aid packs to have been given to companies that anyway would have closed after the
crisis. It has created a higher debt but could have been avoided by a harsher selection before
pursuing an expansionary fiscal policy.
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Assignment 3

As a counselor for the British government, you are to write a briefing note of
maximum 600 words.

The briefing note must contain a presentation of suitable measures with the
purpose of reducing the government debt to GDP ratio after the corona crisis.
Write the briefing note with appendices 8, 9 and 11 as starting points as well as
your responses to assignments 1 and 2.

As a minimum, the briefing note must contain assessments of the consequences

for:

a) Competitiveness
b) Living standards

------------------
To: The British government

From: The government counselor

Note regarding suitable measures to deal with the high debt-to-GDP ratio

Britain is in serious debt problems

As a result of the covid-19 crisis, Britain has experienced a high general government debt.
It has increased from 113,9 percent in 2018 to 157,4 percent in 2021. This massive increase is
due to the tight expansionary fiscal policy that we made use of to trigger economic growth.

While it has been necessary to avoid large unemployment and prevent a drastic fall in
demand, it has been hard on the government and is eager to create even higher inflation.
Therefore, we must decide what to do, in order to get the British economy back to normal.
As we all know, Covid-19 has had big consequences for countries worldwide, and we can
still see traces of it in our society. Many companies in the service sector have been forced to
close, and we have become a lot more digitalized. Studies show that over 25 percent of all
restaurants and pubs in Great Britain were threatened to close. During Covid, we chose to
operate with an expansionary fiscal policy, printing electronic money, while buying
government bonds. However, with the fiscal policy, we did not target any specific sectors,
which may have been problematic, as we never specified what people should use their money
for. In this connection spending among many households has been booming since people

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most likely have been scared to lose their jobs. Additionally, many were furloughed, and our
financial aid has thus, helped the most vulnerable to maintain their normal living standards
during the crisis. Therefore, we decided to extend wage compensation for a while, which has
increased debt even further.

Now, what can we do about this situation? – As theorist Keynes always has suggested, we
should not be scared of the increasing government debt, as inflation anyways will reduce the
size of the debt. This is according to him naturally achieved through increased tax revenue
from larger incomes. Hence, the focus should lay on the living standards of the citizens.
Currently, we are still trying to boost the economy by reducing VAT on tourist attractions,
and by giving a grant for eating out to all British citizens, and I believe this might be the right
long-term investment. We should keep supporting selected sectors that have been majorly hit
by the crisis. Approximately 18 percent of the workforce is furloughed, and unemployment is
still increasing throughout the country. An expansionary fiscal policy may thus be important
to keep unemployment low and increase demand. If many become unemployed living
standards will fall, which will affect our GDP negatively. However, the country’s price
competition has a chance of lacking behind, as this policy may create competition among the
workforce, pushing wages up.

How can we combat the high debt quicker?

Since the current policy has resulted in government debt of more than 100 percent of GDP, it
may be necessary to look into other solutions when the British economy starts to recover.
Pursuing a contractionary fiscal policy, aiming at increasing taxes or cutting some public
services, can be our key to success, as it will help us cover government debt.
This can for instance be done through increased taxes of the high-income earners and
companies or higher taxes on fuel or specific food items.
It will, however, have an effect on unemployment of citizens and their living standards, as
they will receive less disposable income, and thereby be able to spend less, creating a
negative multiplier effect. In this connection, the price competition will be affected
positively, as there will not be as much competition between companies for employees. This
gives them a lower production cost, and thus an advantage in terms of price.
Both policies can, therefore, be necessary to pursue, but it depends on what end goal we want
to achieve, and how many further consequences we can stand.

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