An Analysis of Economic Implications of the UK Leaving the EU

Whether the United Kingdom (UK) should remain in the European unio‎n (EU) or not has been a fiercely debated issue both before and after the referendum in the UK on June 23, 2016. The main purpose of this paper is to evaluate the pros and cons of the UK leaving the EU. It is concluded that if the UK leaves the EU, the resulting economic shock would risk adverse effects on macroeconomic variables such as foreign trade, high inflation, employment level, interest rate, aggregate supply and aggregate demand, trade creation and diversion, balance of payments, balance of trade, term of trade, depreciation of the pound sterling, rising consumer price index (CPI) and reduction in the standards of living in the UK. Effects of leaving the EU on money market, labour market and goods market in the UK have also been explored to show the effects on the exchange rate, the interest rate, nominal and real wages and output level in the UK. It has therefore been concluded that it is not in the best interest of the UK to leave the EU. Benefits of remaining in the EU far outweigh the disadvantages.