4.1 International Competitiveness

Question 1

What is international competitiveness?

Answer 1

The sustained ability to sell goods and services profitably at competitive prices in a foreign country

Question 2

What are the 2 categories of international competitiveness?

Answer 2

- Price competitiveness: goods are cheaper than international competitors
- Non-price competitiveness: quality of goods/services more desirable than international competitors

Question 3

What are the 2 measures of international competitiveness?

Answer 3

• Relative unit labour costs
• Terms of trade (relative export prices)

Question 4

What is the relationship between export prices and international competitiveness?

Answer 4

A rise in relative export prices means that UK prices have risen more than competitors, becoming less competitive

Question 5

What is unit labour costs and how is it calculated?

Answer 5

• Labour costs (e.g wages) per unit of output
• Unit labour costs = total labour costs/total output

Question 6

What are 3 main policies to improve international competitiveness?

Answer 6

• Supply side policies
• Exchange rate policies
• Policies to promote macroeconomic stability

Question 7

AO3 for exchange rate policies

Answer 7

• Depreciation makes imports more expensive (some firms may import raw materials, production costs increase)
• Competitive devaluations (other countries may devalue in response)

Question 8

What are 3 components of macroeconomic stability?

Answer 8

- Price stability e.g positive rate of inflation (exports are relatively cheaper, increases investment)
- Fiscal stability (reducing fiscal deficit lowers interest repayments)
- Financial stability (access to credit for smaller businesses, finding for infrastructure)

Question 9

What is terms of trade and how is it calculated?

Answer 9

• A measure of the ratio of a country’s export prices to import prices
• ToT = index of export prices/index of import prices x 100

Question 10

What does an increasing terms of trade number signal?

Answer 10

• Terms of trade are improving
• More imports can be bought for a given amount of exports (export price increasing/import price decreasing)

Question 11

How do exchange rate policies improve international competitiveness?

Answer 11

A government can manipulate a devaluation/depreciation. This makes exports cheaper, which increases international competitiveness

Question 12

How do supply side policies improve international competitiveness?

Answer 12

Supply side policies boost productivity of economy and increase efficiency, shifting LRAS. This makes goods more internationally competitive when selling abroad

Question 13

What are 2 benefits of competitiveness?

Answer 13

• Competitive countries likely to attract foreign investment (new firms create job opportunities, transfer of knowledge)
• Economic growth (increased demand for exports)

Question 14

What are 2 drawbacks of competitiveness?

Answer 14

• Competitive countries may become more dependent on overseas countries exports and imports
• May lead to CA surplus (this could result in an appreciation, reducing competitiveness)

Question 15

What are 3 examples of supply side policies to boost international competitiveness?

Answer 15

• Investment in education/training (increased productivity of workforce)
• Reduction in tax/benefits (increases work incentives, increasing labour supply and decreasing unit labour costs)
• Privatise inefficient industries (private firms profit incentivised to cut costs and raise productivity)

Question 16

What are 2 AO3 points for supply side policies?

Answer 16

• Time lag: delay in efficacy (e.g education investment only effective once enough students have passed through education into workforce)
• Income inequality (reduction in tax/benefits widens income gap)

Question 17

What are 3 factors that influence terms of trade?

Answer 17

• A rise or fall in import/export prices
• Increased productivity compared to
  trading partners, leads to a decrease in ToT
• Changing incomes

Question 18

What are 2 impacts of a change in the terms of trade?

Answer 18

• Improvement in the ToT leads to a fall in GDP
• Improvement in the ToT leads to rise in unemployment
• Improvement in the ToT can worsen CA account on balance of payments