Evaluate the economic effects of Samsung investing in the UK on the balance of payments and national income

Due to the initial investment made by Samsung, one can see that there will be an increase in the capital account. In addition this flow of money associated with investment will, in the long-run stay positive as if the factory brings high profits Samsung  will continue to invest in it. However, Samsung will be repatriating profits made by the factory based in the UK to South Korea and this will have a negative effect on the capital account as money is flowing out of the UK.

The balance of payments must always balance. Although components parts of the accounts may be positive or negative. If there is a surplus on the current account, then outflows on the capital account must be greater than inflows but if there is a deficit on the current account then inflows on the capital account must be greater than outflows.

I will now analyse the effects on national income. Before discussing these effects it is important to define the circular flow of income. The circular flow is a flow of money round the economy as it passes through consumers and producers. It consists of injections and leakages or withdrawals. The injections consist of investment, government expenditure and exports whereas the leakages consist of savings, taxation and imports. The injections and withdrawals of the circular flow of income are always equal due to the national income identity which states that national income = national output = national expenditure.

As a whole Samsung have caused two big effects on the national income in the UK. The initial investment made by Samsung is an injection into the UK circular flow of income, thus increasing national income. However the repatriation of profits means that the profits made by the firm are leaving the UK circular flow and are therefore a leakage, thus decreasing national income.

Within these two big effects of investment and repatriation of profits there are many other issues to discuss. In this case Samsung will produce products sold in the UK and this will increasing national output and therefore national income. They may also export their products to other countries, which is an injection and will therefore add to the increase in national income.  

However they may decide to import workers from South Korea and not employ UK residents. This will have a big impact on national income, as the wages paid to these Korean workers will be leaving the UK, thus they are a leakage to the circular flow of income. Although on the other hand Samsung may decide to employ UK workers, thus increasing national income as these UK workers spend their wages on UK goods and services. The money spent on goods and services will flow into the circular flow of income in the form of an injection.

If Samsung do not decide to employ UK workers, then I can also argue that national income may increase. The reason behind this is that if Korean workers are brought over to the UK, then they will have to spend part of their wages on buying or renting a house and paying living costs such as food, water and electricity. This consumption on living costs will have a multiplied effect on national income. This is because if Samsung pay wages to their workers, the workers will buy food from the supermarket. The food manufacturers would in turn pay their worker who will spend their wages on a variety of products. All these stages in the process increase national income and continue until smaller and smaller amounts are added to national income as the money flows round the economy. The multiplier effect states that an increase in autonomous expenditure will lead to an even greater increase in income.

In conclusion it is clear that there will be an increase in national income, due to the initial investment and the employment of Korean workers, even though there is a big leakage from the repatriation of profits. If Samsung decided to employ UK workers then this would increase unemployment, which is good for the economy. With this increase in national income, I can apply the accelerator theory. The accelerator theory states that the level of planned investment varies with the rate of change of income or output rather than with the rate of interest. The more goods and services demanded from Samsung due to the increase in income, will force them to invest in more capital stock. These changes in spending, lead to much bigger changes in investment.

With reference to the balance of payment in the long-run Samsung will use UK suppliers as they will not have to pay import costs and the UK government due to supply side policies will force Samsung to employ UK workers. Therefore, there will be no imports and so exports will exceed imports leading to a surplus in the current account.