Global economy UK European Economy Impacts of new policy directions

Some have interpreted the withdrawal of the UK from the European Union, so-called ‘Brexit’ (BRitish EXIT), and the policy stance of newly elected President Trump as a decisive turn away from economically rational policies. This question is about the economic impacts of both new policy directions.
Part 1: Brexit
Draw a diagram of the combined UK & European economy along the lines of lecture 8, with the UK labour force read from the left (increasing as you go left to right). The UK currently has around 3 million EU residents living inside its borders, and around 1 million Britons live in the EU, so on balance you can treat the initial equilibrium as one where a restriction of labour mobility would result in a net transfer of workers from the UK to the EU. Mark clearly the UK and European wage in an initial neoclassical equilibrium and the labour allocations if wages are equalized between the UK and the EU.
Q1 (1 mark) What political and economic factors do you think have been important for the creation and maintenance of the European Union since World War Two? What political and economic forces are behind Brexit?
Q2 (1 mark) Suppose Brexit is confined to an ending of labour mobility between Britain and the EU. Show the new UK wage and the new European wage on your diagram.
Q3 (1 mark) Show the output loss to the UK. You may assume that workers in the UK prior to the end of labour mobility count for the UK.
Q4 (4 marks) Do a welfare analysis of the policy for capitalists and workers in the UK and Europe. You may measure worker welfare as the wage and not total compensation to workers.
Q5 (1 mark) Suppose a US-UK trade deal leads to a capital inflow into the UK, which you can treat as an increase in the UK specific factor. Show on your diagram how much the productivity of UK workers would have to rise by to counteract the losses of Q3. You will need to set two areas equal to each other in your diagram to illustrate this.
Q6 (1 mark) Compare the post Brexit situation prior to a capital inflow with the situation after the capital inflow (holding the workers in the UK fixed) and do a welfare analysis on UK workers and capitalists. Who benefits from the capital inflow? What is it about this model that makes this happen and what political or institutional factors might lead to a different result?
Q7 (1 mark) What do you think are the global implications of a UK/EU tax war, where the UK cuts corporate taxes to attract extra investment after Brexit, to obtain advantages similar to a US-UK trade deal? What does this say about the strategy of pursuing policy autonomy (lack of outside interference in politics or government spending) by breaking trade deals and reversing globalization?
You will do well in this question if you have a good understanding of the economic and political factors at play, and the connections between them (focus on CILO 1.2: Demonstrate inter-relationships between differing business and related disciplines)

Part 2: New US Administration
The recent growth of the US energy sector has been staggering. In 2006 60% of US energy was imported, but now the figure is only 36%. Two very different US policies proposed by the Trump administration – an aggressive fiscal expansion and a releasing of energy exports from environmental controls – have very similar macroeconomic effects. This question is about the inter-relationships between these policies and any environmental policies remaining in place.
Q1 (2 marks) Search online for two Donald Trump tweets on Global Warming. Do you think these summarize the likely direction of his government on environmental issues more generally? Why or why not?
Q2 (2 mark) Using the Mundell-Fleming model of lecture 6 show the short run and long run impact of
a US fiscal expansion (hint: you do not need to consider the inflationary impact – you can assume
17/02/2017 (Autumn 2017) © University of Technology Sydney Page 6 of 10
a US fiscal expansion (hint: you do not need to consider the inflationary impact – you can assume trade flows adjust before inflationary pressure emerges). Make sure you write out the national income identity with the long run effects underneath.
Q3 (2 marks) Using the Mundell-Fleming model of lecture 6 show the short run and long run impact of an autonomous increase in US energy exports due to the abandoning of many environmental regulations on energy exploration and exporting (hint: you do not need to consider the inflationary impact – you can assume trade flows adjust before inflationary pressure emerges). Make sure you write out the national income identity with the long run effects underneath.
Q4 (2 marks) carefully compare the long run equilibria of Q2 and Q3. In each case, describe any crowding out that is occurring.
Q5 (2 marks) Which socioeconomic groups in which states supported President Trump’s election? Comment on the likely impact of a real US appreciation for these groups. How could the fiscal expansion be used to compensate them if these effects are negative?
Q6 (2 marks) Does GDP measure environmental degradation? If your answer is ‘yes’ explain how it does so, and if your answer is ‘no’ give one example of how people have proposed to change GDP so that it does.
Q7 (2 marks) Suppose any environmental degradation arising from the US consumption of energy was subject to a Pigovian tax (a tax on consumption where the tax paid fully covered the environmental damage). Starting from an initial macroeconomic equilibrium at full employment output, trace out the short run and long run adjustment to this tax. Be sure to include the national income identity with long run effects beneath.
Q8 (6 marks total) Advise President Trump on a package of policies which will protect the environment and benefit the groups that elected him. State your policies clearly (2 marks) Outline the short run impacts (2 marks) and include the national income identity with the long run effects (2 marks).
You will do well in Q1, Q3, Q4, Q6 and Q7 if you understand environmental policies and their macroeconomic impacts (focus on CILO 4.2: Critically analyse sustainability principles for various stakeholders in relation to business contexts). You will do well in the remaining questions if you exhibit good analytic skills (focus on CILO 2.2: Apply critical and creative thinking to address issues in business)


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