4.1.9 International competitvness Flashcards
what is competitiveness?
the sustained ability to sell goods profitably at competitive overseas prices
what is price competitiveness based on?
- labour costs
- international competitvess
- TOT
what is non-price competitiveness?
- quality
- innovation
- design
- reliability
whats the unit labour cost?
labour costs per unit of output
labour costs/total output
how can unit costs be lowered?
- monetary policy intervention
- wage controls
- supply-side measures designed to raise labour productivity
what are relative export prices?
one country’s export prices in relation to other countries
when will relative export prices rise?
- there’s an appreciation of currency
- there’s a period of high relative inflation compared to other countries
- when export businesses have higher costs
- when exporters are hit with import tariffs
policies to improve competitiveness?
- competitve exchange rate
- competitive tax environment ➡️ attract inward investment and encourage new business start-up’s
- investment in human capital
- increased research + development ➡️ drive inovation
- stable macroeconomic economy
what matters for competitiveness in the long run?
- strong micro foundations
- infrastructure and innovation
- reliance on currency depreciation
why do countries choose to internally devaluate?
when a country seeks to improve price competitiveness and not reduce the external value of its exchange rate
whats an external devaluation?
when a country with a fixed or semi-fixed exchange rate system decides to lower the external value of its currency
➡️ a devaluation of the currency means a domestic currency buys less of a foreign currency
risks of internal devluation?
- fall in nominal wages reduced living standards
- risk from sustained deflation
- real value of debt increases
- danger of loosing permanent loss of output
risks of external devaluation?
- increase in cost plus inflation
- reduces real incomes because of inflation
- no guarantee that trade deficit will improve
- currency uncertainity means less FDI
whats internal devaluation?
when a country wants to improve price competitveness by lowering its wage costs and increasing productivity but doesnt reduce the external value of their exchange rate (achieved through deflationary policies)
why do countries choose to externally devaluate?
- makes exports more competitive (cheaper)
- makes imports more expensive than domestic products
- reduce trade deficit
➡️ fastest way to improve competitvness
