4.1 - International competitiveness

Question 1

What is international competitiveness?

Answer 1

The sustained ability of companies in a country to successfully compete with companies from other countries by selling goods and services profitably.

Question 2

What are two measures of international competitiveness?

Answer 2

1) Relative unit labour costs

2) Relative export prices:

Question 3

What are relative labour costs?

Answer 3

The average cost of labour per unit of output produced.

Question 4

How are relative labour costs measured?

Answer 4

total wages in an economy divided by output

Question 5

What do lower relative export prices suggest about international competitiveness?

Answer 5

Lower relative export prices indicate greater competitiveness, as it means a country’s products are more attractively priced in international markets.

Question 6

What do relative export prices compare?

Answer 6

• Relative export prices compare the prices of a country’s exports to those of its competitors.
• It involves analysing the price levels of similar products produced in different countries.

Question 7

What are relative export prices?

Answer 7

Average cost of exports compared to that of other country’s exports

Question 8

What do lower relative labour costs suggest about international competitiveness?

Answer 8

• A lower relative unit labour cost indicates greater competitiveness, as it suggests that a country can produce goods and services at a lower labour cost

Question 9

What factors influence international competitiveness?

Question 10

What are the two main categories of international competitiveness?

Answer 10

1) Price competitiveness
> goods are cheaper than international competitors

2) Non-price competitiveness
> better quality goods/services are more attractive than those of international competitors

Question 11

What factors influence international competitiveness?

Answer 11

• Exchange rates
  > Depreciation of a countries currency makes that countries exports cheaper - increases international competitiveness
• Productivity
  > A rise in productivity levels of a country’s workers, relative to their competitors, will lower the production cost per unit and increase competitiveness
• Regulation
  > Government regulation raises costs of production by setting standards / requirements that firms have to meet as well as slowing down business decisions, making them
  less adaptable to changes in the global market
  > decrease international competitiveness
• Investment
  > Investment in infrastructure improves productivity, helping firms to deliver and produce G/S reliably, cheaply and efficiently
  > Investment in
  research and development allows firms to innovate (eg: technology)
  > which reduces costs and increases efficiency.
  > increase international competitiveness
• Taxation
  > High levels of taxation (increase costs of production) reduce investment and so cause a reduction in
  international competitiveness in the long term
• Relative rate of Inflation
  > Inflation raises the price of goods/service in an economy
  > lower levels of inflation = lower prices = increased international competitiveness
• Domestic demand and competition
  > Good levels of domestic demand mean firms in the country will already be producing a large output and so can exploit
  economies of scale, reducing average costs.
  > High levels of competition will mean firms already have to produce good quality or cheap products.
  > allow them to compete internationally
• Wage and Non-wage costs
  > Increases in labour costs, relative to other countries, make exports more expensive as the costs of production have increased resulting in a worse level of competitiveness
  > Increases in non-wage costs such as pensions or social security taxes paid by the employer are likely to reduce output or raise costs of production, thus making exports less competitive
• Trade policies
  > low trade barriers make costs of production cheaper for firms that rely on imports (eg: raw materials)
  > increasing international competitiveness

Question 12

What are the benefits of being internationally competitive?

Answer 12

• Export led growth:
  > An increase in exports generates an increase in economic activity (component of AD) resulting in economic growth
• Unemployment decreases:
  > Economic growth leads to an increase in employment (labour is derived demand), incomes and wage growth
• Current account surpluses:
  > exports are likely to be greater than imports and the government does not have to concern itself with difficult policy decisions aimed at reducing a large deficit
  > surplus allows them the opportunity to invest overseas and build up a surplus of
  assets overseas, on which interest, profit and dividends can be earned.
• Increased overseas foreign direct investment (FDI):
  > It provides finance for firms to invest in overseas assets which in the long-term means they are able to increase their income and profit
  > Competitive environments attract foreign investment, leading to economic development.
• Standards of living improve:
  > as incomes tend to rise with economic growth, households gain purchasing power and access to a wider variety of goods/services

Question 13

What are the problems of being internationally uncompetitive?

Answer 13

• Trade Deficits:
  > Uncompetitive countries may import more than they export, leading to trade imbalances.
• Economic Decline:
  > A lack of competitiveness can result in declining industries and economic stagnation.
• Unemployment:
  > Uncompetitive industries may shed jobs, leading to high unemployment rates.
• Income Inequality: A lack of competitiveness can exacerbate income inequality as some industries decline while others thrive.
• Government policies: with a current account deficit and a lack of international competitiveness, governments will focus more of their resources on gaining ground. E.g. more spending on supply-side policies. Any policy action creates opportunity costs and trade-offs