Tuesday, September 13, 2016

Brexit and Trump's Potential Trade Wars - The Same Problems?

From Tyler Cowen - Marginal Revolution:

"Nonetheless imports are almost 30 percent of British GDP, which you can take as one possible measure of what eventually might be spent on the outputs of foreign nations. So plausibly, in the long run that 30 percent becomes 10 percent more expensive because of the weaker British currency. Thirty percent of 12 trillion [national wealth] is 3.6 trillion, and the 10-percent value decline from that figure is 360 billion pounds, or about 5,625 pounds per capita. a pretty steep price for the Brexit vote.

To put that 360 billion pounds in context, that is about 19 percent of 2015 British GDP, much costlier than a typical recession. The bigger loss, however, is less psychologically painful because it is spread out over many years, basically the rate at which the British will spend down their wealth. And if you view the country as a wealth-generating mechanism for the future, in fact the actual costs will be higher because hitherto-unproduced wealth will be worth less too, although those costs are more distant yet.

This isn’t any kind of formal international trade model, with a full set of measurements and moving variables. It’s just a simple way of showing that the costs of Brexit can be high without a recession. It is quite possible and indeed likely that various adjustments, including a move away from foreign imports, would lower these costs. On the other side of the ledger, Brexit could help create a negative political and economic momentum that is not captured here either. Nonetheless this is a gross approximation of the first-order hit to British wealth."

No comments:

Post a Comment

Note: Only a member of this blog may post a comment.