4.1.9 International Competitiveness

Question 1

What is external competitiveness

Answer 1

Is the sustained ability to sell goods and services profitably at competitive prices overseas

Question 2

What is price competitiveness

Answer 2

Key measure: Differences in relative unit labour costs (ULCs)

Question 3

What is non-price competitiveness

Answer 3

Key aspects: Product quality, innovation, design, reliability and performance, choice, after-sales services, marketing, branding, brand loyalty and the availability and cost of replacement parts

Question 4

What are 4 Non-wage costs

Answer 4

• Environmental taxes
• Employment protection law & health and safety regulation
• Statutory requirements for employers
• Employment taxes

Question 5

What are Unit Labour Costs (Price Competitiveness)

Answer 5

• Are labour costs per unit of output
• Unit labour costs = total labour costs/total output

Question 6

Unit labour costs are determined mainly by:

Answer 6

• Average wages/salaries in a country’s labour market
• Labour productivity - output per hour worked

Question 7

Does Unit Labour Costs increase or decrease when wages are rising faster than productivity

Answer 7

Increase

Question 8

Relative unit labour costs will rise when:

Answer 8

A country’s exchange rate appreciates

Wage Costs rise relatively faster than other nations

Labour productivity growth is relatively slower

Question 9

How to reduce relative unit labour costs

Answer 9

• Monetary policy interventions aimed at a currency depreciation e.g. managed-floating exchange rate
• Wage control - pay freezes
• Supply-side measures designed to raise labour productivity

Question 10

What are relative export prices

Answer 10

are one country’s export prices in relation to other countries, usually expressed as an index

Question 11

When will relative export prices rise

Answer 11

• appreciation of the currency – causing export prices to rise
• period of high relative inflation in one country - makes exports more expensive
• export businesses experience higher costs - leading them to raise prices
• exporters of goods/services are hit by import tariffs

Question 12

What type of things are included on the annual Global Competitiveness Index published by the World Economic Forum (WEF)

Answer 12

• Effectiveness of institutions
• Quality of infrastructure
• Macroeconomic performance
• Health and primary education
• Higher education and training
• Efficiency of good/labour markets
• Technological readiness
• Sophistication of business
• Innovation

Question 13

What policies could help improve competitiveness

Answer 13

• depreciating exchange rate
• Competitive tax - encourage new business start-ups
• Investment in human capital
• Research and development
• Investment in infrastrucutre

Question 14

Fiscal policy and international competitiveness

Answer 14

1. Subsidies to lower cost of research and development
2. tax insensitive - to encourage entrepreneurship
3. Lower employment taxes
4. special economic zones

Question 15

What are the advantages of being internationally competitive

Answer 15

• Improved living standards
• Stronger trade performance from increased export sales
• economic growth
• Employment
• Gov tax revenues

Question 16

Problems with international competitiveness

Answer 16

• May cause a protectionist reposnse from other country’s
• Demand-pull inflation
• Unequal growth and inequality
• Poor work-life balances
• might cause exchange rate to depreciate

Question 17

What is an internal devaluation

Answer 17

when a country seeks to improve price competitiveness through lowering their
wage costs and increasing productivity and not reducing the external value of their exchange rate

can be brought about by fiscal austerity (via higher taxes and cuts in government
spending) and/or a sharp rise in real interest rates

Question 18

What type of country would use internal devaluation

Answer 18

several years of low relative inflation

more likely to happen with a country that has a fixed exchange rate

Question 19

What is external devaluation

Answer 19

Happens when a country operating with a fixed or semi-fixed exchange rate system
decides to deliberately lower the external value of their currency against one or a range of other currencies

A devaluation of the currency means a domestic currency buys less of a foreign currency

Question 20

Why might a country carry out external devaluation

Answer 20

One motivation is to make exports more price-competitive in overseas markets and to make imports relatively more expensive than domestic supply

aims might include reducing the size of a trade deficit and also cutting the real value of money.

In theory, currency devaluation is a fast way of improving price competitiveness than an internal devaluation.

Question 21

What are the risks from an internal devaluation

Answer 21

• Severe loss of output and rising unemployment
• Fall in nominal wages reduces living standards
• Risks from sustained price deflation
• Real value of debt increases

Question 22

What are the risks of an external devaluation

Answer 22

• Increase in cost-push inflation from higher import prices
• Reduces real incomes because of a rise in inflation
• No guarantee that the trade deficit will improve (refer to the J Curve concept)
• Foreign creditors will demand higher interest rates on new issues of government & corporate debt
• Currency uncertainty makes a country less attractive to inward FDI