QUESTION
Hi sir, I just have a question regarding external influences on the national economy. I don’t quite understand why it has such an influence, whilst I understand that say, if America were to go into recession it would affect our trade, but our exports make up such a small fraction of our aggregate demand, so I can’t get my head around why it has such a great effect. Could you explain some of the other outcomes if this were to happen?
Thanks, Taylor.
ANSWER
Very good evaulative points raised Taylor.
The reasoning behind the old saying: 'If America sneezes the UK catches a cold" is because some of our UK firms that are export based may risk closure and job losses. Also US decline will affect the whole world, China slows down as well, so even our trade to non US economies will be damaged. Plus the negative export multiplier effect. This may then damage confidence leading to falls in C and I.
In addition Investment Income by UK firms in USA and elsewhere will decline as well.
Mr Gray
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