4.1.9 - international competitiveness Flashcards
What is international competitiveness?
Refers to the ability of a country to sell its goods/services to other countries. It is usually determined by the price/quality of the product.
What are two measures of international competitiveness?
- relative unit labour costs
- relative export prices
What is a likely impact of a country having low levels of competitiveness?
They are more likely to face a current account deficit
How are relative unit labour costs used to measure international competitiveness?
Unit labour costs are total wages divided by real output = the cost of employing workers for each unit of good. They are measured in an index number with one year chosen as the base year. The data is compared to other countries. A rise in relative unit labour costs shows the costs are rising and the country is becoming less competitive than other countries.
How are relative export prices used to measure international competitiveness?
This is the price of UK exports compared to 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 so they have become less competitive.
What are some factors influencing international competitiveness?
- relative unit labour costs, heavily dependent on productivity
- wages and non-wage costs relative to competitors
- rate of inflation relative to competitors
- regulation relative to that of competitors
- exchange rates
- investment
- taxation
- economic stability
- flexibility
- competition and demand at home
- FOPs
- openness to trade
How do exchange rates impact international competitiveness?
A rise in the pound causes exports to become more expensive, making UK goods less competitive as price changes. However, this is dependent on the elasticity of the good.
How does productivity impact international competitiveness?
A rise in productivity will cause a rise in the UK’s competitiveness due to lower costs, leading to a fall in prices. Labour productivity can impact relative unit labour costs.
How does regulation impact international competitiveness?
High regulation slows down business decisions, making them less adaptable to changes in the global market. Also increases their costs of production, therefore reducing competitiveness.
How does investment impact international competitiveness?
Investment in infrastructure improves productivity and ensures firms can deliver and produce their product reliably, cheaply and efficiently. Investment in R&D allow firms to develop new products, increasing competitiveness, and new technology, which reduces costs and increases efficiency.
How does taxation impact international competitiveness?
High levels of taxation reduces investment, reducing international competitiveness in the long term. It reduces incentives for individuals to take risk, reducing innovation and therefore competitiveness.
How does inflation impact international competitiveness?
Low levels of inflation increase competitiveness since UK goods increase in price less than other countries over time, increasing competitiveness over time.
How did economic stability impact international competitiveness?
If the country is not seen as economically stable, there will be little long-term investment, reducing competitiveness over time.
How does flexibility impact international competitiveness?
If the labour market is flexible, this will improve competitiveness as businesses will be able to move labour in response to change in demand. They can prevent unnecessary wage rises, keeping costs and prices low. Flexible and efficient managers are able to manage change within the company and adapt production when demand changes.
How does competition and demand at home impact international competitiveness?
A good level of domestic demand means that firms are already producing in large numbers, experiencing economies of scale so that they have low AC curve. High levels of competition means that firms have to have good quality or cheap products to survive. Both these factors ensure international competitiveness.
How do FOPs impact international competitiveness?
A country with lots of good quality FOPs are able to produce higher quantity and quality goods than a country with limited/low quality resources.
How does openness to trade impact international competitiveness?
Trade barriers may be low, so other countries are likely to have low barriers on goods coming from the UK, so it is easier and cheaper to export. It also means that firms inside the UK won’t suffer from high costs of production due to import barriers.
What are the benefits of international competitiveness?
- current account surplus = allows them to invest overseas and build a surplus of overseas assets, so that interest, profit and dividends can be earned.
- likely to attract inflows of foreign investment, by establishing new firms or buying domestic firms, which can create jobs. This leads to a transfer of knowledge, skills and technology.
- employment is likely to increase because more goods are produced, since more are exported and less imported. A rise in demand for labour leads to higher wages.
- there will be export-led economic growth, due to supply side improvements because of efficiency, investment and demand side improvements relating to X and M
What are the problems of international competitiveness?
- competitiveness can be easily lost eg. developing countries who benefit due to lower labour and material costs could see this eroded when they experience export-led growth.
- current account surplus may lead to a rise in the exchange rate, reducing competitiveness
- less competitive countries may implement trade barriers to protect themselves from more competitive economies.
- competitive countries may become more dependent on overseas countries, so they suffer if there is a global recession or if trade is disrupted
What are the problems of being internationally uncompetitive?
- current account deficit = may be reliant on imports and exports may be uncompetitive, increased costs for the economy, reduced investment and profits
- lack of foreign direct investment
- leads to higher unemployment due to reduced demand for exports, leads to lower wages
- may be an economic contraction
