4.1.9 International Competitiveness Flashcards
What are the two main measures of international competitiveness?
- Unit labour costs
- Relative export prices
What is meant by the real exchange rate?
The RER measures the exchange rate of one currency compared to another, taking into account changes in price level. RER = ER x (price level in country A/price level in country B)
What is meant by the sterling effective exchange rate?
This looks at the value of a currency against a basket of other currencies which is weighted depending on the proportion of trade done in each currency. This gives an overview of whether the currency is appreciating or depreciating against the currencies of its main trading partners.
Identify and explain 3 factors that will affect the relative unit labour costs of a country over time.
- Productivity: if output falls per hour, then productivity will fall, meaning that the average cost of labour rises per unit of output.
- Wages: if wages rise at a faster rate than productivity then unit labour costs will rise.
- If labour taxes such as employers NI payments rise, then this will increase the cost of employing labour, so unit labour costs will rise.
Identify and explain factors that will affect the relative export prices over time
Other than labour costs, export prices can be affected by other costs of production such as regulations, business rates, energy prices and most importantly the exchange rate. If the ER strengthens, then relative export prices will rise. In the LR, supply-side issues, such as investment into infrastructure, R&D innovation, health, education and skills will also affect the relative export prices.
Identify the 12 pillars of competitiveness used by the Global Competitive Index to rank countries in terms of competitiveness
- Institutions
- Infrastructure
- Macroeconomic stability
- Health
- ICT adoption
- Skills
- Product market
- Labour market
- Financial system
- Market size
- Business dynamism
- Innovation capability
What are the benefits of being internationally competitive?
- Can achieve export-led growth
- Can provide jobs
- Can generate multiplier effects on the economy as increased trade is an injection into the circular flow.
Are there any issues with being internationally competitive?
- Becoming more internationally competitive may increase your countries’ exposure to global economic shocks such as the global financial crisis.
- It may not be sustainable if an increase in competitiveness strengthens your currency, then this will negate the competitiveness.
What is meant by labour productivity?
Labour productivity is output per hour
How might high relative inflation rates affect a countries competitiveness?
If a countries’ price level is rising at a higher rate than its competitors, then this country will become less price competitive.
What is the Hecksher-Ohlin hypothesis?
This is a theory linked to comparative advantage that states that a country will export goods that use its abundant factors intensively, and import goods that use its scare factors intensively.
