4.1.9 international competitiveness

Question 1

Measures of international competitiveness:
relative unit labour costs

Answer 1

​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.

Question 2

Measures of international competitiveness:
relative export price

Answer 2

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.

Question 3

Factors influencing international competitiveness

Answer 3

• exchange rates
• productivity
• regulation
• investment
• taxation
• inflation
• economic stability
• flexibility
• competition and domestic demand
• factors of production
• opens to trade

Question 4

Significance of international competitiveness:
benefits and problems of being internationally competitive

Answer 4

• 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.
• There will be ​economic growth​, both by supply side improvements due to efficiency and investment and by demand side improvements relating to X-M.
• However, the problem with being internationally competitive is that 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. Despite this, 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