influences on the UK’s international competitiveness (3)

Question 1

macroeconomic factors influencing UK’s international competitiveness

Answer 1

• SUPPLY SIDE POLICIES
• investment in education -> improvement in human capital -> workers gain skills + knowledge -> boosts labour productivity -> lowers unit labour costs + improves quality of labour force -> increased LRAS -> lower price level -> UK goods + services cheaper to foreign buyers -> more internationally competitive
• investment in healthcare -> healthier workforce by reducing absenteeism -> increased efficiency -> incr LRAS (diagram) -> boosts productive potential
  APPL -> NHS investment rose post-COVID.
• LOWERING INTEREST RATES
• IR fallen to 4.25% in recent years -> hot money outflow due to diminished returns -> less demand for £ (exchange rate diagram) -> currency depreciation -> reverse SPICEE -> improves trade balance + improved BOP -> increased price competitiveness for UK exports e.g. tourism
  APPL: interest rates cut to 0.1% in 2020 due to COVID

Question 2

evaluate macroeconomic factors influencing UK’s international competitiveness

Answer 2

INTERNATIONAL COMPETITIVENESS MAY NOT IMPROVE BECAUSE:
- currency depreciaiton -> incr cost of imported raw materials -> incr cost of imported goods for UK consumers -> erodes purchasing power -> imported inflation
- if UK exports = price inelastic -> lower prices may not significantly increase foreign demand Additionally, if UK exports are price inelastic, a lower price may not significantly increase demand abroad

• supply-sdie policies -> time lag; in the SR benefits may not fully materialise -> costly and may contribute to worsened gov. debt

Question 3

microeconomic factors influencing UK’s international competitiveness

Answer 3

• REDUCTION IN CORPORATION TAX
• lowers tax burden on firms -> incr retained profits -> incentivise firms to invest in capital goods, R&D -> improves dynamic efficiency + ability to exploit technical economies of scae -> lower LRAC (diagram) -> pass on to consumers -> incr consumer surplus + improved price-competitivess of the product
  internationally.
  APPL - corp tax fell from 28%->19% post-Brexit to compete with other countries

Question 4

evaluate microeconomic factors influencing UK’s international competitiveness

Answer 4

• INTERNATIONAL COMPETITIVENESS MAY NOT IMPROVE BECAUSE
• firms may not use the extra retained profits to reinvest -> may distiribute dividends to shareholders or buy back shares instead of increasing productivity -> less dynamic efficiency -> limited quality improvements -> less internationally competitive
• reduced gov. revenue -> limiting funds available for public investment -> harms long-term competitivess