Question 2. The UK is one of the largest recipients of inward foreign direct investments (FDI). However, FDI flows slowed due to Brexit and last year inflows fell by about 50%. Assume in your answers that this fall represents a sizeable net disinvestment in the UK for the last couple of years. FDI inflows into the UK, Q1 2016 - Q3 2020 E billions 100 80 60 40 20 0 -20 40 Q1 Q2 Q3 Q4|Q1 Q2 Q3 Q4/Q1 Q2 Q3 Q4|Q1 Q2 Q3 Q4|Q1 Q2 Q3| 2016 A. Most FDI flows into the UK are in high skilled services (software and IT, business, financial and communication) and much fewer in manufacturing (industrial machinery, equipment and tools). Assume that the UK economy is composed only of these two sectors. In the short run, FDI capital is specific to services but in the long-run if can be re-allocated to manufacturing too. Use graphs to discuss the short and long-run effects of a net disinvestment in the UK (outflow of the FDI) for output and employment in the two sectors. (Hint: Use graphs similar to figures 5-10 and 5-11 in your textbook but with services and manufacturing as the two sectors.] (60 marks) B. What are the short- and the long-run implication of FDI outflows for rentals on capital? Use a graph to explain. Do you think FDI flows into the two sectors are affected differently by the UK's exit from the EU? (40 marks) FINAL PAGE 3 Question 2. The UK is one of the largest recipients of inward foreign direct investments (FDI). However, FDI flows slowed due to Brexit and last year inflows fell by about 50%. Assume in your answers that this fall represents a sizeable net disinvestment in the UK for the last couple of years. FDI inflows into the UK, Q1 2016 - Q3 2020 E billions 100 80 60 40 20 0 -20 40 Q1 Q2 Q3 Q4|Q1 Q2 Q3 Q4/Q1 Q2 Q3 Q4|Q1 Q2 Q3 Q4|Q1 Q2 Q3| 2016 A. Most FDI flows into the UK are in high skilled services (software and IT, business, financial and communication) and much fewer in manufacturing (industrial machinery, equipment and tools). Assume that the UK economy is composed only of these two sectors. In the short run, FDI capital is specific to services but in the long-run if can be re-allocated to manufacturing too. Use graphs to discuss the short and long-run effects of a net disinvestment in the UK (outflow of the FDI) for output and employment in the two sectors. (Hint: Use graphs similar to figures 5-10 and 5-11 in your textbook but with services and manufacturing as the two sectors.] (60 marks) B. What are the short- and the long-run implication of FDI outflows for rentals on capital? Use a graph to explain. Do you think FDI flows into the two sectors are affected differently by the UK's exit from the EU? (40 marks) FINAL PAGE 3
