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Theme 4 > 4.1.9 Internation Competitiveness > Flashcards

4.1.9 Internation Competitiveness Flashcards

1
Q

Competitiveness

A

the ability of a country to sell its g/s abroad
- usually determined by the price/quality of the g/s

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2
Q

Measures of international competitiveness

A
  • relative unit labour costs: how much labour costs per unit of output
  • relative export prices: the ratio of one country’s export prices relative to another country.
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3
Q

Factors influencing international competitiveness

A
  • exchange rate- macro
  • rate of inflation relative to competitors- macro
  • relative unit labour costs- micro
  • regulation relative to that of competitors- micro
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4
Q

Factors influencing international competitiveness (exchange rates)

A
  • Appreciation = exports will be more expensive
  • Devaluation = temporary boost to competitiveness
  • E.g: Between 2008 and 2009, there was a 30% devaluation of the pound = short-term boost to competitiveness
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5
Q

Factors influencing international competitiveness (exchange rates) evaluation 1

A

however, although depreciation = improve competitiveness of exports also = increase cost of importing raw materials. Therefore firms who rely on imports will see higher costs.

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6
Q

Factors influencing international competitiveness (exchange rates) evaluation 2

A
  • also a country may experience a depreciation since it is uncompetitive and its goods are in less demand.
  • e.g: UK saw little benefit from the 2008/09 depreciation since demand was weak.
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7
Q

Factors influencing international competitiveness (exchange rates) evaluation 3

A
  • this only happens with real exchange rate (the value of a currency- taking into account relative changes in prices).
  • Increase in real exchange rate = includes inflation = stronger exchange ate = decline in competitiveness
  • e.g: if there are political fears about the strength of the Euro, investors may buy Swiss Francs(since it is seen as a safe haven currency). Swiss Francs = appreciate = increase in real exchange rate = Swiss exports less competitive
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8
Q

Factors influencing international competitiveness (productivity)

A
  • skills of the workforce
  • education
  • infrastructure/industrial relation
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9
Q

Factors influencing international competitiveness (productivity: skills of the workforce)

A
  • how trained and flexible are the labour force)
  • e.g: the rapid automation of the UK economy = lack of skills. China has lower labour costs than countries such as UK and US so production requiring manufacturing e.g clothes has moved abroad.
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10
Q

Factors influencing international competitiveness (productivity: education)

A
  • Education (long-run factor)
  • Increased education = increased skills and labour productivity
  • E.g: Between 1990 and 2005, UK productivity grew faster than Germany = UK more competitive
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11
Q

Factors influencing international competitiveness (productivity: infrastructure/industrial relation)

A
  • Infrastructure in the economy: good transport and communication = cheaper to transport goods
  • Industrial relations: strikes = loss of time, unmotivated, no loyalty to company
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12
Q

Factors influencing international competitiveness (productivity: education) evaluation

A

the effectiveness of spending on education is questionable. Investment might be better spend elsewhere

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13
Q

Factors influencing international competitiveness (rate of inflation)

A
  • Rate of inflation relative to competitors
  • e.g: Japan has had a consistently low inflation rate (from 1970 to 2014) than its main international competitors (e.g US and Eurozone). Ceteris paribus, this small increase in prices will improve the competitiveness of Japanese exports
  • e.g: In the late 1970s, the US had the highest rates of inflation = declining competitiveness of British exports and decline in manufacturing industry
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14
Q

Factors influencing international competitiveness (rate of inflation) evaluation

A

low inflation may be offset by an appreciation in the currency. Although Japan has had the lowest inflation rate in this period, it also saw an appreciation in the value of the Yen. So the gains from lower inflation were offset by the stronger currency.

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15
Q

Factors influencing international competitiveness (regulation relative to that of competitiors)

A
  • excessive regulation
  • low tax rate
  • levels of access to finance
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16
Q

Factors influencing international competitiveness (regulation relative to that of competitors: excessive regulation)

A
  • Excessive regulation = hard for firms to invest = increase average costs of production
  • e.g: the UK govt established the ‘Red Tape Challenge’ aiming to simplify business regulation = cheaper and easier to meet environmental targets = new jobs = encourage investment and innovation = domestic firms more internationally competitive
  • e.g: France has excessive employment laws = hard for small enterprises to compete
17
Q

Factors influencing international competitiveness (regulation relative to that of competitors: low tax rate)

A
  • Low tax rate = incentive to earn more since they can keep more of their income
  • E.g: in 2015, UK govt tried to increase competitiveness by lowering the corporation tax rate from 21% to 20%.
  • Switzerland is one of the most competitive despite being a small country since it is a tax haven = encourages a lot of inward financial flows
18
Q

Factors influencing international competitiveness (regulation relative to that of competitors: low tax rate) evaluation

A

low tax rate = govt receive fewer tax receipts = limit public spending. This depends on how important public services are to each country

19
Q

Factors influencing international competitiveness (regulation relative to that of competitors: level of access to finance)

A

Level of access to finance. Lack of access = firms can’t borrow from the banking sector to boost investment when they need to = reduced investment in new productive capacity

20
Q

Benefits of international competitiveness

A
  • strong trade performance
  • improved living standards
  • economies of scale
  • employment creation
21
Q

Significance of international competitiveness

A
  • A competitive economy = high growth rate, a healthy balance of payments, rising wages and living standards, full employment and will probably attract a lot of foreign direct investment.
  • A noncompetitive economy = social tensions & political instability.
    Governments can do a lot to improve competitiveness, through a mixture of supply-side policies, exchange rate policy and macro-economic policies.
22
Q

Benefits of international competitiveness (stronger trade performance)

A
  • lower unit labour costs = productivity gains= stronger trade performance
  • comparatively cheaper exports = export-led growth e.g China
  • e.g the UK’s vision is short-term and profit driven whilst Germany has lots of small and medium sized enterprises (SMEs), many of which are family run. SMEs tend to focus on supply-side policies for long run growth, rather than MNCs which are profit drive- machinery, auto parts.
23
Q

Benefits of international competitiveness (improved living standards)

A
  • an improvement in international competitiveness is likely to lead to an improvement in the trade balance
  • represents an increase in net injections into the circular flow of income = AD increase
  • firms have incentive to increase production to meet the extra demand = employ more labour
  • income increase = GDP rise
  • increases in GNI per capita/reductions in extreme poverty
  • e.g China
24
Q

Benefits of international competitiveness (economies of scale)

A
  • domestic firms can reach out to more consumers and gain economies of scale
  • e.g only 32%of McDonald’s sales are generated in America, whilst 40% were from Europe
25
Q

Benefits of international competitiveness (employment)

A
  • the emergence of industries, growth of existing industries
  • increase demand for X = creates jobs in the export sector
26
Q

Benefits of international competitiveness (improved living standards) evaluation

A
  • however, it is more costly for firms to produce this higher level of output = increase their prices= increase in inflationary pressure (demand pull inflation)
  • rising employment, GDP & = improve living standards but depends on policy responses to rising inflation e.g environmental impact of growth and effect on inequality
27
Q

Benefits of international competitiveness (stronger trade performance) evaluation

A
  • trade surpluses might invite protectionist response from other countries
  • e.g protectionism
28
Q

Benefits of international competitiveness (stronger trade performance) evaluation

A
  • might cause a country’s exchange rate to appreciate
29
Q

UK infrastructure (interventionist-based) - micro

A
  • +ve: UK is in the process of building HS2 = increased access to the Northern parts of the UK = greater efficiency
  • -ve: London has increasing flat prices further buoyed by demand pull inflation = not enough affordable housing
30
Q

UK unit labour costs

A
  • as of April 2022, the national minimum wage is set to rise to £9.50.
  • In April 2021, output per hour worker was 0.6% above levels prior to the Covid-19 pandemic
  • rising productivity may offset rising labour costs, so prevent a loss of competitiveness
31
Q

UK exchange rates

A
  • GBP £1 TO 1.20 USD Nov 2022 which is quite weak- good for exports but not for consumer & business confidence & has inflationary effect (M more expensive)
32
Q

See sheet feedback

A
33
Q

How might supply side policies conflict with other macro objectives?

A
  • cuts in direct taxation on household incomes & corporate profits = more inequality & relative poverty = damage competitiveness over time since unable to afford good quality education & healthcare
34
Q

Give one microeconomic effect of a rise in minimum wage in developing countries

A
  • higher income = reduction in absolute poverty = increase spending on education and healthcare = development
  • might encourage more people to entry the formal labour market and increase female labour market participation
35
Q

Evaluation of minimum wage reducing absolute poverty

A
  • impact firms = increase wage costs = cut employees
36
Q

Give one macro effect of a rise in minimum wage in developing country

A
  • worsening net trade
  • Exports, FDI & Economic Growth
  • Vietnam relies heavily on export-led growth in garments / footwear – rising unit labour costs might reduce their price competitiveness – worsening of net trade would affect growth
37
Q

Why might a minimum wage impact developing countries a lot? (Micro)

A
  • many Vietnamese firms are labour-intensive – so higher MW likely to impact on costs
  • but depends on what happens to labour productivity.
  • Might accelerate process towards capital-labour substitution
38
Q

Why might a minimum wage impact developing countries a lot? (Macro)

A
  • minimum wage reduces SRAS (inflationary) and will also affect aggregate demand
  • but increased productivity would raise LRAS.
  • Consequences for Vietnamese exporters depends in part on the exchange rate.

Theme 4 (18 decks)

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