i. Tariffs-These are government’s tax on import or export such as tax on motor vehicles leaving or getting in the country.
ii. Non-tariff barriers- These are trade barriers that limit import (restricts imports) or export of goods or services (that is vehicles for this case) through other means apart from infliction of tariff.
iii. Supply chain-This is the succession of procedure involved in the production and distribution of a commodity (motor vehicle for this matter).
b) What is the European Union (EU) and why is the single market important to business
European Union is an international political and economic organization found within Europe that was formed in 1993 with the basic aim of promoting greater social, political and economic agreement among its members, and with a total of 28 member states. After the Brexit they are only 27 member countries.
The main importance of single market to businesses is the availability of freedom in which goods and services are freely traded with other integrated members thus providing a wider market for goods, citizens can move to and fro with no restrictions and there is also free flow of capital among the member states. This provides larger market base to producers reduces the production costs and also provides broad opportunities to members. The legal procedures on imports are also non existing to members thus speeding up imports and exports to its members.
2a) i. Identify the main companies who supply cars to the United Kingdom and their market share
The table below shows the leading car suppliers to the United Kingdom market according to the data from Statista (The Statistic Portal ) which was based on the survey of December 2017.
Motor Companies
Motor Market Share out of 100%
Ford
10.19%
Volkswagen
10.06%
BMW
8.84%
Vauxhall
8.72%
Audi
7.0%
Mercedes Benz
6.84%
Nissan
5.09%
Toyota
3.4%
Hyundai
3.3%
Peugeot
2.71%
Citroen
1.43%
Others
35.22%
Figure 1 Table showing top 11 shareholders motor industries in the United Kingdom market
ii) What type of market structures exist
Oligopolistic market structure. Since automobile industry in the United Kingdom is not dominated by a single motor firm and thus other automobile industries are also there in the market to share profit and for competition.
b) Explain, using economic diagrams, how price and output is determined by a typical firm (ie: one motor car company) which is operating in the market. (Note that your market will be imperfect competition, not perfect competition. Thus, you cannot use supply and demand diagrams in this question).
Consider the diagram below for price and output for Ford Industry in the short run
Diagram for price and output determined by Ford Company in the short run
Figure 2 Diagram illustrating relation of price and output in the imperfect market
Where;
Q-output
MC-marginal cost
MR-marginal revenue
AR-price
From the diagram above, the firm maximizes profit where MR=MC. This is at output Q1 and price P1, leading to large profit. In the short run the above diagram is similar to that for a firm in a monopoly.
Price-Output Equilibrium under Monopolistic Competition. In monopolistic competition, profits are majored at a point where marginal revenue is equal to marginal cost. The price determined at this point is known as equilibrium price and the output produced at this point is called equilibrium output.
3.a) On a chart show what has happened to the United Kingdom pound (sterling) against the euro between May 2016 and December 2017
Figure 3 Showing the Exchange rate value between Euro and Pound over time from May 2016 to December 2017.
The chart shows a steady falling and quick rise at some points in the exchange rate of sterling but the general trend is a fall in the value sterling exchange rate.
b. Using economic theory (diagrams), explain the change in the sterling exchange rate during June 2016.
During July 2016, sterling exchange rate showed a steady fall in exchange rate thus depreciation in the exchange rate. This basically means the value of sterling was worth less compared to euro.
Figure 4 Economic diagram showing explaining the exchange rate in sterling
Depreciation causes a fall in exchange rates thus exports become cheaper while imports become expensive. There will then be increased export and a decreased import which benefits domestic firms. Job is also created for the locals in the export sector. However, over long run there are negative impacts to the economy of such a country.
c) Using a simple numerical example, explain how a depreciation of the pound may impact on a United Kingdom car manufacturer importing components from Germany.
Consider the case where in the 2007the exchange rate was £1= € 1.50
By January 2009 the value of Pound had decreased (depreciated) such that £1= € 1.10
Let’s consider this exchange rate to the price of car exported to Germany.
Suppose a car component manufactured in British costs £4,000 to manufacture and sells for £5,000 in the United Kingdom.
Thus in 2007, for the European market this vehicle component would be €7,500 (5,000*1.5)
While in 2008, The European market price of this car component would be €5,500 (5,000*1.1)
4 a) Identify the possible impact on car manufacturers who are located in the United Kingdom and export cars to the European Union if the United Kingdom does not reach a trade agreement with the European Union following Brexit.
Exporters would be significantly be affected by the Brexit negatively if trade agreements are not reached since there will be restriction on the movement of their goods between European Union countries as a result of significant changes to; required standards for products, technology and the legal procedures and environmental control. They will no longer enjoy the freedom that once existed while they were under the union but they would instead be subjected to the lengthy legal procedures for the imports and there will be no free circulation of their car products to the European market.
The car manufacturers will also be subjected to the tariffs and be treated like the rest of the world in each of the 27 members’ state of European Union.
b) Evidence suggests business confidence and investment is lower since the United Kingdom voted to leave the European Union on 23rd June 2016. Using relevant economic theory (diagram) explain how this may possibly lead to slower United Kingdom economic growth over the next 10 to 15 years.
Factors that determine long run economic growth
In the long run, economic growth is defined by elements that shape growth of Long Run Aggregate Supply (LRAS). If there is no increase in LRAS, then a rise in AD will just be inflationary.
Figure 5 Economic diagrams explaining how business confidence reduces economic growth
Consumer confidence is an economic indicator that measures the degree of optimism that consumers feel about the overall state of the economy and their personal financial situation. Consumer and business confidence is a key for determining economic growth in any country. If consumers are certain about the future they will be motivated to borrow and spend more. However if they are pessimistic they will save and spend less
These uncertainties are evident in the United Kingdom since the United Kingdom exited the European Union. Value of exchange rates is one of the factors in determining consumer’s confidence. If the value of Pound persists in depreciating then export would become more competitive and imports more expensive. This would in short term increase the value of domestic goods and services. In the long run however it may not boost economic growth of a country.
Real wages have also been affected over the recent years in the United Kingdom that is a fall in the real wages since inflation has been above the nominal wages therefore causing a decrease in real income. This therefore forces the consumers to reduce their spending on mostly the expensive goods.
Since the majority of United Kingdom citizens are homeowners, asset prices would really affect their spending. Therefore the rising house prices would create a potential wealth effect since people can re-mortgage versus the appreciating value of their homes and thus promoting more consumer spending
Interest rates also can determine the rate of economic growth. United Kingdom has however been experiencing low interest rates from 2009 to 2016, but due to low confidence and reluctance in bank lending, economic improvement was still poor. If this was to continue over time then there would be no economic growth.
References
Rhiannon Bury, ‘Opportunistic Foreign Investors May Swoop on UK Assets as Pound Slumps’, Telegraph, 6 July 2016
Roger Blitz, ‘Who Are the Winners and Losers From the Pound’s Fall?’, Financial Times, 7 October 2016.
Stein, Jerome L. Monetarist, Keynesian, and New Classical Economics. Oxford: Basil Blackwell Publishing, 1982
https://www.statista.com/statistics/300467/leading-car-companies-market-share-in-the-united-kingdom/
https://www.x-rates.com/average/?from=GBP"to=EUR"amount=1"year=2016b
