Exploring implications of Krugman’s eyewatering cost of Brexit

Nobel prize winning economist, Paul Krugman, in his NYT op-blog, claimed that the financial impact of Brexit would be 2% of GDP to perpetuity. What does that really mean?

Let’s do the maths.

The UK’s GDP is USD2,678 Trillion.

So how much is the 2% reduction identified by Krugman?

USD2,678 Trillion * 0.02 =  USD54 Trillion annually to perpetuity.

What’s the value of USD1 to perpetuity, i.e. for ever?

In today’s value USD1 received every year to perpetuity would be worth USD33.33, assuming a 3% return.

Open this link for an explanation of perpetuity. Simply, ‘perpetuity’ is a stream of equal payments that does not end. Given an annual rate of interest, we can calculate the present value of the perpetuity. For simplicity, we can use a published model.

As the UK Treasury assumes a 3% long-run cost of capital, we can calculate the present value of the USD54 Trillion annually to perpetuity. This amounts to USD 1,800 Trillion.

So let’s recap, if we assume a permanent erosion of GDP of 2% to perpetuity and our starting GDP is USD2,678 Trillion, then the present value of the loss of 2% (USD54 Trillion annually to perpetuity) is USD 1,800 Trillion.

The numbers are so large that I cannot simply apply a reasonableness test.

So if there are any quantitative types out there, would you please double check my maths?

Of course, the calculation are based on the assumptions deployed by Paul Krugman and the UK Treasury.

The implications are staggering.

As for my own views, I’m passionate about remaining in the EU. See my earlier blog.

What really scares me about the #Brexiteers is that there are no detailed costings of alternative scenarios nor risk assessments. Does the #Brexit campaign have any substance other than promoting false fear of immigration?