7) International Competitiveness - MMT Flashcards
Being competitive means that potential customers give … consideration to buying your products, as they represent good … for money
Being competitive means that potential customers give serious consideration to buying your products, as they represent good value for money
how can good value be reflected?
Good value can be reflected either in lower prices or higher quality.
what is the main main factor that affects international competitiveness? how?
Exchange rates is clearly one; many countries (China being a great example) deliberately keep the value of their currency low, thus making their exports cheaper
what is an obvious factor that affects international competitiveness? why?
The most obvious is by controlling inflation; if your inflation rate is lower than competing countries then prices of your exports should be relatively cheaper than them.
what are the factors that affects international competitiveness?
1) Exchange rates
2) inflation
3) labour market
4) strength of institutions
how does the labour market affect international competitiveness?
with more flexible labour markets can keep wages down, thus keep costs down, meaning lower relative prices for exports.
However, there are also ways in which highly developed economies with high labour costs and strong exchange rates can be competitive
how does the strength of institutions affect international competitiveness?
the strength of your institutions (financial markets etc), ease of doing business, quality of the labour force; all of these help internationa competitiveness
what are examples of institutions?
courts, universities, central bank, bond markets, london stock exchange
Devaluing a currency should in theory… international competitiveness.
improve
… a currency should in theory improve international competitiveness.
devaluing
Devaluing a currency should in theory improve international competitiveness, however why might this not happen straight away?
The Marshall Lerner Condition states that a devaluation of a currency improves the BoP (current account) only if the sum of price elasticities of demand for imports & exports are greater than one.
This is often not the case.
Devaluing a currency should in theory improve international competitiveness. what would initially happen in the short run?
In the short term, demand for both imports and exports tend to be price inelastic so reducing the price of exports/increasing import prices will not have an immediate effect, mainly due to the time scale involves (e.g. businesses being tied into existing contracts with overseas businesses)
Devaluing a currency should in theory improve international competitiveness. what diagram shows initially what will happen in the short run?
The J-Curve
Analysis of the J-Curve
The vertical axis shows the current account balance of
surplus payments, surplus above the line, deficit below. When the currency is devalued, due to the price inelastic nature of X&M the deficit initially gets worse. However, over time the devalued currency helps to improve international competitiveness of the country meaning that it should eventually help turn a deficit into surplus.
short term: INELASTIC OR ELASTIC?
inelastic
what is the terms of trade?
The Terms of Trade is the average price of exports / by the average price of imports. It is a measure of a country’s relative competitiveness.
what happens as a result of being more competitive?
Becoming more competitive will lead to a higher demand for your exports meaning the terms of trade should improve. Confusingly though, improved terms of trade may then make you less competitive, if it is caused by an increase in your export prices.
which sort of countries in particular is the terms of trade important for?
Terms of Trade is a a particularly important indicators for developing countries whose economies often depend on the price of key commodities (e.g. Zambia/Copper).
what can deteriorations in terms of trade result in for developing countries?
Deteriorations in the terms of trade can be highly damaging to them as they receive less revenue from their exports.
how do you calculate terms of trade?
index of export prices/index of import prices X100
if the answer is above 100 terms of trade have improved
is the UK competitive?
World Economic Forum UK scores highly, 12 pillars of competitiveness.
what is a flexible labour market?
workers have little power, UK is flexible, easier to hire and fire
