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

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Introduction

b) Evaluate the economic effects of such an investment on: (i) The UK's balance of payments (ii) The UK's national income b) In this essay I intend to discuss the economic effects of Samsung investing in the UK on the balance of payments and national income. Before analysing the economic effects it is important to define the balance of payments. The balance of payments is a record of all financial dealing over a period of time between economic agents of one country and all other countries. The balance of payments accounts can be split into two components. The current account where payments for the purchase and sale of goods and services are recorded and the capital account where flows of money associated with savings, investment, speculation and currency stabilisation are recorded. It is true to say that Samsung will be manufacturing a product in their factory and will want to sell both to the UK residents and abroad to other countries. The payments for the purchase and the sale of these goods will be recorded in the current account. To manufacture these goods Samsung will need to purchase machinery, raw materials and a workforce. ...read more.

Middle

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. ...read more.

Conclusion

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. ...read more.

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