This revision short looks at some of the Micro & Macro Effects of the AI Boom on the UK Economy

🔍 Microeconomic Effects

💼 Lower Marginal Costs & Higher Efficiency

→ AI tools (e.g. ChatGPT, Copilot) automate tasks like customer service, reducing marginal costs and increasing productive efficiency.

→ Potential for economies of scale and higher profits or lower prices for consumers.

👷 Labour Market Disruption

→ Routine jobs may be displaced (e.g. admin, support roles) → structural unemployment.

→ Demand rises for AI-complementary roles (e.g. data scientists), leading to wage polarisation.

→ Est. 1–3 million UK jobs at risk (Tony Blair Institute).

🌍 Negative Externalities

→ AI data centres are highly energy-intensive (68GW by 2027).

→ Generates negative production externalities due to carbon emissions and power use.

→ 1 ChatGPT query = 2.9 Wh; 10x a Google search.

📊 Market Structure: Oligopoly

→ Few dominant firms (OpenAI, Google, Amazon, Microsoft).

→ High barriers to entry (R&D, data, compute power) → potential for collusion or price wars

→ Personalised AI services increase consumer utility, but pricing algorithms may enable price discriminationand exploit bounded rationality.

📊 Macroeconomic Effects

📈 Boost to Productivity & Growth

→ AI improves total factor productivity, lifting long-run aggregate supply (LRAS).

→ Could help UK escape low-growth trap, raise tax revenue, reduce debt.

🌍 Trade & Current Account Impact

→ UK AI services (e.g. DeepMind, fintech) boost services exports, helping current account.

→ BUT: high imports of AI hardware (chips, servers) hurt the goods balance.

💷 Income Inequality

→ Profits concentrated in AI firms; risk of widening wage and regional inequality.

→ Could exacerbate Gini coefficient if unaddressed.

📉 Inflation & Investment Effects

→ Short run: AI investment increases aggregate demand (AD).

→ Long run: lower costs may reduce cost-push inflation.