ChainWhat it assumes · how to break it
Start
The government invests in infrastructure, for example new rail links, roads, broadband and energy networks.
1
As a result, better ports, rail freight and digital networks cut firms' transport and logistics costs.
costs of production
costs of production
Assumes: Exporters use the new infrastructure.
But: If the investment is in commuter rail rather than freight and ports, exporters gain little.
2
This means UK firms can cut prices or deliver more quickly and reliably.
price and non-price competitiveness
price and non-price competitiveness
Assumes: Firms pass the savings on.
But: Firms may keep the savings as higher profit rather than cutting prices.
3
Consequently, UK goods and services become more competitive at home and abroad.
international competitiveness
international competitiveness
Assumes: Competitors abroad are not improving faster.
But: Other countries are also investing, so the UK may only keep pace rather than gain ground.
4
Therefore, exports rise and UK producers win back sales from imports.
current account
current account
Best link to attack
Assumes: Price and reliability drive demand for UK goods.
Assumes: Price and reliability drive demand for UK goods.
But: Export demand depends more on incomes abroad and the exchange rate than on small changes in costs.
End
The current account improves in the long run.
Attack the whole chain: In the short run the project raises AD and needs imported materials and equipment, so the current account may get worse before it gets better.
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Questions this answers
- Assess the use of supply-side policies to reduce a current account deficit.
- Discuss how infrastructure investment might improve international competitiveness.
- Evaluate policies to improve the UK's trade performance.
Diagram
No standard diagram. An AD/AS diagram with LRAS shifting right supports the competitiveness point.
Reverse and related
Underinvestment in infrastructure → higher costs → weaker export performance.