4.1.9 International competitiveness

Question 1

International competitiveness

Answer 1

The ability of a business/country to compete effectively in international markets.

Question 2

Measures of international competitiveness

Answer 2

Price related factors:
* Relative unit labour costs
* Relative export prices
* Relative productivity

Non-price related factors:
* Design
* Quality
* Reliability
* Availability

Question 3

Relative unit labour costs

Answer 3

A measure of the cost of the labour needed to generate output.

If one country has lower unit labour costs than another country, then (ceteris paribus) that country will be more competitive – i.e. better able to sell its products.

To compare unit labour costs in different countries, you need to convert each country’s unit labour costs to the same currency.

Question 4

Relative export prices

Answer 4

Exchange rates are a key determinant of relative export prices.

• For example, if the value of a country’s currency falls, its exports will become relatively cheaper and its competitiveness will increase.

The cost of labour will also have a significant effect on relative export prices, especially in labour-intensive industries, such as many manufacturing industries.

Question 5

Relative productivity

Answer 5

Increasing productivity (e.g. the output per worker per hour) will have a similar effect on competitiveness to reducing unit labour costs – i.e. all other things being equal, higher productivity mean greater competitiveness.

Question 6

Non-price factors used to judge international competitiveness

Answer 6

Design: Are the country’s products what people want to buy?

Quality: Are products well made, and do they work properly?

Reliability: Do a country’s products keep working?

Availability: Is it easy to buy a country’s products?

Question 7

Factors affecting international competitiveness

Answer 7

• Exchange rate
• Productivity (and education/training)
• Wage + Non-wage costs
• Regulation
• Quality
• R&D (and innovation)
• Taxation

Question 8

How do exchange rates affect international competitiveness?

Answer 8

A rise in the UK’s exchange rate is likely to make UK goods less price competitive abroad and imports more competitive in UK markets. A fall in the UK’s exchange rates is likely to make UK goods more price competitive abroad and imports into the UK less competitive. The extent to which there is a change in competitiveness depends on the PED for a good. The lower the PED, the less impact a change in price caused by the change in exchange rate will cause.

Question 9

How does productivity (and education/training) affect international competitiveness?

Answer 9

Rises in the UK’s productivity relative to its main trading partners will increase the UK’s competitiveness. An increase in productivity will likely lead to the firm cutting its prices, making its goods more internationally price competitive. However, if foreign firms at the same time have increased their production by a higher amount, the country’s relative productivity will have fallen, making it less competitive.

Question 10

How do wage + Non-wage costs affect international competitiveness?

Answer 10

Non-wage costs include NI contributions, sick pay, holiday pay, pension contributions, etc. They tend to be highest in developed countries. | For example, if the UK’s wage and non-wage costs rise relative to its main trading partners, then the UK will become less internationally competitive. Increases in wage costs are likely to lead to increases in price. So a 10% rise in wages in the UK is likely to lead to some rise in export prices.

Question 11

How does regulation affect international competitiveness?

Answer 11

Increases in regulation of an industry tend to increase costs of production for firms. For example, Chinese firms tend to have a lower cost of production than firms in France, the UK and Germany because regulation is lighter in China. Hence, less regulation is likely to increase international competitiveness.

Question 12

How does quality affect international competitiveness?

Answer 12

Firms which produce better quality products that their international rivals will have a competitive advantage. Much of the UK’s manufacturing sector in recent years has only survived because it has avoided price competition with cheaper labour countries because of its uniquely high quality products.

Question 13

How does R&D (and innovation) affect international competitiveness?

Answer 13

Research and development influences the uniqueness of a product. Firms/industries which invest lots of money into R&D will have unique products to sell in the future, giving them an advantage over firms/industries in other countries which chose to not invest in R&D. R&D may also help to reduce costs of production if it leads to new equipment being introduced.

Question 14

How does taxation affect international competitiveness?

Answer 14

Levels of corporation tax are important to international competitiveness. Low taxes on profit encourage investment and innovation, which lead to improved international competitiveness. High taxes on profits lead to deteriorating international competitiveness.

Question 15

Supply-side policies which could be used to improve the economy’s competitiveness

Answer 15

• Improve education and training (which will improve labour market flexibility)
• Improve labour market flexibility in other ways
• Encourage competition
• Create incentives for firms to invest
• Cut “red tape”
• Encourage immigration
• Maintain economic stability
• Improve infrastructure

Question 16

Evaluation points (disadvantages) of policies improving international competitiveness

Answer 16

It may not be simple to introduce these policies as it takes a long time to feel their full effect.

• For example, it takes a long time to plan and built extra schools and colleges to improve education and training.
• Some policies may be controversial – e.g. trade union reforms can be unpopular with some people.
• There may also be difficulties in affording these policies – e.g. the government may not be able to spend money on improving infrastructure, or firms may not be able to invest at the most appropriate time.

Question 17

How can improving labour market flexibility (via education and training) improve international competitiveness?

Answer 17

E.g. apprenticeships allow people to learn practical skills while gaining relevant qualifications.

Improvements in education will not only allow employees to become more productive (and therefore reduce unit labour costs), but can also lead to greater occupational mobility.

Question 18

How can restricting the power of trade unions improve international competitiveness?

Answer 18

E.g. in the past, policies have been introduced that weakened some of the powers of trade unions – firms are now able to make workers redundant more easily when times are tough.

Question 19

How can encouraging competition improve international competitiveness?

Answer 19

E.g. deregulation can lead to improved efficiency in the market.

Privatisation may be effective if nationalised industries are inefficient.

Question 20

How can creating incentives for firms to invest improve international competitiveness?

Answer 20

E.g. offer firms tax breaks (i.e. reductions in the amount of tax they need to pay) if they invest profits instead of paying dividends to shareholders. There can be many outcomes of investment – for example, investment in research can lead to improvements in product quality and productivity.

Question 21

How can cutting ‘red tape’ improve international competitiveness?

Answer 21

This means removing any regulations that no longer seem necessary and which may be increasing firm’s costs unnecessarily – e.g. outdated environmental or health-and-safety regulations.

Making it easier to set up a company can lead to more entrepreneurship and innovation.

Question 22

How can encouraging immigration improve international competitiveness?

Answer 22

Foreign workers may have the skills that businesses need.

This can be a very quick way to obtain the human capital needed in an economy.

Question 23

How can maintaining economic stability improve international competitiveness?

Answer 23

E.g. by keeping inflation low, exchange rates steady and the balance of payments under control.

Question 24

How can improving infrastructure improve international competitiveness?

Answer 24

E.g. build faster transport links or improve communication links.

Question 25

Advantages of international competition

Answer 25

• If a country’s exports are relatively cheap, there’ll be higher demand for them. This will mean increased AD, economic growth and levels of employment.
• Many countries have current account deficits – increasing exports (and reducing imports) helps to correct this imbalance.

Question 26

Consequences of falling international competitiveness

Answer 26

• A country that’s less able to sell its products is likely to experience a worsening in its balance of payments, because exports will fall while imports increase.
• In addition, as economic activity generally decreases, unemployment will probably increase.
• Remaining competitive is particularly important for countries whose industries rely on international trade to achieve economies of scale.

Question 27

Disadvantages of international competitiveness

Answer 27

• If a country has a current account surplus, relatively cheap exports will worsen this imbalance.
• If a country is so competitive that it’s over-reliant on exports, this leaves it vulnerable to shocks (e.g. if a major trading partner suffers from a recession).

Question 28

Consequences of focusing on international competitiveness

Answer 28

• A flexible labour market is useful for competitiveness – but this leads to difficulties for workers because of the uncertainty it creates (e.g. a lack of job security).
• Countries might neglect the environment, e.g. by not keeping pollution levels down.