4.1.9 International Competitiveness Flashcards
International competitiveness
The lower the level of international competitiveness, the more likely that the country will face a current account deficit. For goods to be competitive internationally, they need to be cheap, have good quality, design or after-sales and good marketing.
Measures of international competitiveness
1) Relative unit labour costs
2) Relative export prices
Relative unit labour costs
Unit labour costs are total wages divided by real output: the cost of employing workers for each unit of good.
- These are measured in an index number with one year chosen as a base year. Unit labour costs in the UK are compared to other countries. A rise in relative unit labour costs in the UK shows that labour cost per unit is rising faster in the UK compared to other countries and so the UK is becoming less competitive.
Relative export prices
This is the price of UK exports compared to the exports of the UK’s main trading partners. A rise in relative export prices means UK export prices have risen more than other countries’ export prices and so the UK has become less competitive.
Factors influencing international competitiveness
- Exchange rates
Exchange rates
A rise in the pound will cause exports to become more expensive, and thus make UK goods less competitive as their price changes.
- However, this depends on the elasticity the good and the reaction of the firms as explained in 4.1.8.
Productivity
A rise in productivity will cause a rise in the UK’s competitiveness because costs are lower and so prices will fall.
- Labour productivity is important.
Regulation
High levels of regulation slow down business decisions, making them less adaptable to changes in the global market.
- It also increases their cost of production. Therefore, regulation reduces competitiveness because of higher costs and slow decision making.
Investment
Investment in infrastructure improves productivity and ensures firms can deliver and produce their product reliably, cheaply and efficiently.
- Investment in research and development allows firms to develop new products, which increases competitiveness as other countries won’t have these products, and new technology, which reduces costs and increases efficiency.
Taxation
High levels of taxation reduce investment and so cause a reduction in international competitiveness in the long term. It can also reduce incentives for individuals to take risk, and thus reduce innovation.
Benefits of competitiveness
- By being competitive, a country will experience current account surpluses. This surplus allows them the opportunity to invest overseas and build up a surplus of assets overseas, on which interest, profit and dividends can be earned.
- A competitive economy is likely to attract inflows of foreign investment, whether this be by establishing new companies (creating jobs) or buying domestic firms. This will lead to a transfer of knowledge, skills and technology to firms.
- Employment is likely to increase because more goods are being produced, since more goods are exported and less are imported, so more are sold internationally and domestically. A rise in demand for labour will lead to a rise in wages.
Problems of competitiveness
- This competitiveness can be easily lost. Developing countries who have benefits due to lower costs of labour and costs of materials etc could see this eroded when they experience export led growth due to their competitiveness. A current account surplus may lead to a rise in the exchange rate, reducing their competitiveness. Less competitive countries may implement trade barriers to protect themselves.
Eval: International competitiveness is not always lost with development e.g. Singapore and Germany. - Countries who are competitive may become more dependent on overseas countries and so this may mean they suffer from larger issues if there is a global recession.
