International Competitiveness

Question 1

What is external competitiveness

Answer 1

Sustained ability of a country’s business to sell goods and services profitably at competitive prices in overseas markets

Question 2

What is the core measure of competiiveness

Answer 2

A nations relative unit labour costs expressed in a common currency

Question 3

Key measure for price / cost competitiveness

Answer 3

Difference in relative unit labour costs

Question 4

Key aspects for non price competitveness

Answer 4

Product quality, innovation, design, reliability and performance, choice, after-sales services, marketing, branding, brand loyalty and the availbility and cost of replacement parts

Question 5

Non wage cost factors for businesses operating in international markts

Answer 5

Environmental taxes

Employment protection laws

Statutory requirements for employer pensions

Employment taxes

Question 6

Unit Labour cost formula

Answer 6

Total labour costs / total output

Question 7

What are unit labour costs determined mainly by

Answer 7

Average wages / salaries

Labour Productivity

Question 8

How to lower relative unit costs

Answer 8

Monetary policy interventions

Wage controls

Supply side measures

Question 9

When will unit labour costs rise

Answer 9

Country’s exchange rate appreciates

Wage costs rise relatively faster than other nations

Labour productivity growth is relatively slower

Question 10

When will relative export prices rise

Answer 10

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

Question 11

Policies to improve competitiveness

Answer 11

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

Question 12

What can fiscal policy do to increase international competitiveness

Answer 12

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

Question 13

What matters for competitiveness in the long run

Answer 13

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

Question 14

What is an internal devaluation

Answer 14

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

Question 15

What is an external devaluation

Answer 15

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

Question 16

Why may a country externally devalue a currency

Answer 16

Reduce the size of a trade deficit

Cut the real value of sovereign debt owned to international creditors

Question 17

Risks from an internal devaluation

Answer 17

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

Question 18

Drawbacks from an external devaluation

Answer 18

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

Question 19

Benefits to International Competitiveness

Answer 19

Improved living standards
Stronger trade performance
Virtuous circle of economic growth
Employment creation
Higher government tax revenues as incomes and profits increase

Question 20

Drawbacks to International Competitiveness

Answer 20

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