Evaluate The Likely Economic Effects Of A Fall In UK’s Competitiveness
If the UK’s competitiveness falls it could be due to a number of price factors such as higher wages, increased inflation and non-price factors such as quality and after sales service. However, a fall in competitiveness will have some serious impacts on the UK economy.
The first impact that a fall in competitiveness will have is the effect it will have on the current account of our balance of payments. If the UK’s competitiveness falls then the demand for our exports will decrease and domestic consumers are more likely to import foreign goods. This has a negative effect on the current account and if this is the case in the long run then we are likely to see a current account deficit. Running a current account deficit can be harmful if it is financed through borrowed credit as it can be unsustainable in the long run and countries will be faced with high interest payments. Also a balance of payments deficit may cause a loss of confidence in the economy as the markets may view a country having a lack of control on their finances.
The next affect that will come due to a loss of competitiveness and a decrease in exports will be reduced profits and increased unemployment for UK companies. If we lose our competitiveness there will be less demand for our goods and therefore we will see demand deficient unemployment. The extent of this unemployment will obviously depend on a few factors like the state of the economy; as if confidence is high and the economy is growing then firms are less likely to fire workers, what sector is effected the most; for example some industries depend a lot more on exports and thus a fall in competitiveness will affect their business more than a company that has a lot of domestic customers. As the business cycle will show this is likely only to be a short-term problem and when our competitiveness increases again unemployment levels will decrease again....
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