International Competitiveness Flashcards
What is external competitiveness
Sustained ability of a country’s business to sell goods and services profitably at competitive prices in overseas markets
What is the core measure of competiiveness
A nations relative unit labour costs expressed in a common currency
Key measure for price / cost competitiveness
Difference in relative unit labour costs
Key aspects for non price competitveness
Product quality, innovation, design, reliability and performance, choice, after-sales services, marketing, branding, brand loyalty and the availbility and cost of replacement parts
Non wage cost factors for businesses operating in international markts
Environmental taxes
Employment protection laws
Statutory requirements for employer pensions
Employment taxes
Unit Labour cost formula
Total labour costs / total output
What are unit labour costs determined mainly by
Average wages / salaries
Labour Productivity
How to lower relative unit costs
Monetary policy interventions
Wage controls
Supply side measures
When will unit labour costs rise
Country’s exchange rate appreciates
Wage costs rise relatively faster than other nations
Labour productivity growth is relatively slower
When will relative export prices rise
Appreciation of the currency
Period of high relative inflation in once country compared to others
When export businesses experience higher costs
When exporters of goods and services are hit by import tariffs
Policies to improve competitiveness
Competitive exchange rate
Competitive tax environment to attract inward investment and new enterprise
Investment in human capital to improve the quality of the workforce
Increases R+D
Stronger marker competition
Stable macroeconomic environment
Investment in critical infrastructure
What can fiscal policy do to increase international competitiveness
Subsidies to lower the cost of research
Tax incentives can encourage the commercialisation of ideas
Lower employment taxes to stimulate skilled migration for overseas
Lower capital gains taxes encourage small businesses / start-ups
Special economic zones to attract research intensive businesses
What matters for competitiveness in the long run
Macro competitiveness has important micro foundation - competitive markers and innovative businesses - skills, aptitudes and attitudes within a diverse workforce
Competitive advertisings comes from having - globally scaled businesses close to or are the technological frontier - a culture of innovative businesses start-ups - a strong financial system
Reliance on currency depreciation / devaluation and wage cuts is not a sustainable competitiveness strategy - most competitive countries tend to have the highest minimum wages - continuous global battle for most talented highly skilled workers - races to the bottom have a limited impact in the long run
What is an internal devaluation
When a country seeks to improve price competitiveness through lowering wage costs and increasing productivity
Requires several years of low relative inflation
Can be brought about by fiscal austerity and likely to happen with a country that has a fixed exchange rate
What is an external devaluation
When a country with a fixed or semi-fixed exchange rate system decides to deliberately lower the external value of their currency against one or a range of other currencies
Happens when a currency buys less of a foreign currency
Why may a country externally devalue a currency
Reduce the size of a trade deficit
Cut the real value of sovereign debt owned to international creditors
Risks from an internal devaluation
Severe loss of output and rising unemployment
Fall in nominal wages reduces living standards
Risks from sustained price deflation
Real value of debt increases
Danger of a country suffering a permanent loss of output
Drawbacks from an external devaluation
Increase in cost push inflation from higher import prices
Reduces real incomes because of a rise in inflation
No guarantee that the trade deficit will improve
Foreign creditors will demand higher interest rates on new issues of government and corporate debt
Currency uncertainty makes country less attractive to inward FSI
Benefits to International Competitiveness
Improved living standards
Stronger trade performance
Virtuous circle of economic growth
Employment creation
Higher government tax revenues as incomes and profits increase
Drawbacks to International Competitiveness
Trade surplus per might invite a protectionist response
Possible risks of demand pull inflation
Competitiveness might be achieved at the expense of growing inequality and wealth
Higher productivity might be achieved at expense of a worsening work life balance and increased incidence of mental health problems
Might cause a country’s exchange rate to appreciate
