International Competititveness

Question 1

What is international competitiveness?

Answer 1

International competitiveness refers to how easy it is/how successful firms are in selling their products abroad

Question 2

How can international competitiveness be measured?(3)

Answer 2

1. Relative Unit Labour costs (ULC): This is the wage divided by real output. if a firm employs 100 workers at $10/hr & it produces 500 units/hr then the ULc is (10ox$10)/ soo $2. In other words the labour costs of producing 1 unit are $2. This is considered important since capital costs are likely to be similar across the globs, so the real difference in costs will come from labour.
2. Relative export prices: This is the price of (say UK exports compared to the export prices of the UK’s main trading partners & is shown as an index. Thus a rise in relative export prices means the goods the UK is exporting have gone up in price compared to the exports of its trade partners & so the UK has become less competitive.
3. Export prices compared to import prices: Similar to above, this compares (say) UK export prices & UK import prices; if export prices are rising faster than import prices then this suggest the UK is becoming less competitive. The Terms of Trade’ is an (index of export index of import prices so an improvement in the terms of trade suggests an prices economy is becoming less competitive.

Question 3

What factors influence a country’s international competitiveness?(8)

Answer 3

This falls into 3 main categories: Price competition, sub-divided into exchange rates & relative costs of production, & non-price competition.

• Real Exchange rate- A fall in the value of the currency (say £) makes UK goods more price competitive abroad & make imports less price competitive (WPIDEC). We often look at a trade weighted (effective) real exchange rate, that is compared to a ‘basket’ of currencies of the countries you trade with. The extent to which this occurs depends on the PED of the sports/imports and how firms react.
• Productivity (relative reduces unit labour costs compared to other countries depends on supply side policies (education, role of Unions, labour laws etc) & level of investment.
• Wages (relative): again means lower relative unit labour costs -depends on cost of living. productivity, labour laws, role of TU, supply of labour (retirement age, immigration…..)
• Non-wage costs (relative): other costs of employing labour-National Insurance contributions, holiday entitlement, working week, maternity leave, costs of firing workers again depends on labour laws
• Cost of capital: finances investment productivity -depends on interest rates but also influenced by Corporation Tax rates.
• Relative rate of inflation changes relative costs in countries
• Relative transport costs
• Non-price factors (research & development/ innovation, quality, image, design, after sales, delivery reliability & time…)

Question 4

Evaluate the factors which influence a country’s competitiveness (3)

Answer 4

• Relative importance of factors above to a particular country.
• Nature of products exported PED of x-how important is price? Many UK exporters compete on quality not price! Rolls Royce….
• SR & LR, some factors vary in SR & may not give an accurate idea of trend

Question 5

What policies can the government use to increase competitiveness?(10)

Answer 5

• Supply side policies in labour market - education/training, reduce NMW, reduce TU power improves productivity -lower unit costs
• Supply side policies in “goods market” - encourage competition -improve productivity
• Encourage R&D -tax relief or subsidies to help firms new products/ production techniques lower unit costs
• Reduce interest rates - encourages investment
• Lower taxes - more profit for investment
• Improve infrastructure - gov spending on roads, rail, ports etc. reduce costs & speeds up delivery time/ improves reliability
• Policies to reduce inflation - higher interest rates
• Depreciate currency - lower interest rates QE- direct intervention in the FX markets
• Encourage immigration- increased supply of labour - lower wages
• Cut “red tape” - reduces costs

Question 6

Evaluate government policies that can be used to increase competitiveness?(5)

Answer 6

• Conflicts -eg lower interest rates promote investment BUT may cause inflation
• Time lag of many policies- improving competitiveness may be a long term project
• Relative importance of labour capital costs will vary country to country, even industry to industry
• Supply side policies not guaranteed success (improved education, R&D…)
• Floating exchange rates can’t be controlled by gov can only influence it (via interest rates QE or even direct intervention (buying/ selling currencies))

Question 7

What are the problems in sustaining international competitiveness?(3)

Answer 7

• For emerging economies the competitive benefit of low wages is likely to be eroded as the country develops economically & wage rates rise. The same could apply to other domestic costs (land).
• Being competitive implies a current account surplus, which implies high demand for the currency (to buy the exports). This should then increase the value of the currency & so reduce competitiveness.
• Less competitive countries may be tempted to introduce trade barriers (ie tariffs), which would make your goods less competitive.