International Competitiveness

Question 1

What is international competitiveness?

Answer 1

Refers to a country’s advantage or disadvantage in selling its products in international markets at a P and quality that’s attractive in those markets. 2 types:
- price and non-price competitiveness

Question 2

What are measures of international competitiveness?

Answer 2

1) Relative unit labour costs
- measurement of labour costs in 1 country relative to those in another country
- international comparisons: figures converted into single currency and expressed as index number
2) Relative productivity measures
e. g output per worker per hour worked
3) Composite indices: global competitive index based on 12 pillars of competitiveness incl:
- macroeconomic stability
- labour market efficiency
- infrastructure
- health and primary education

Question 3

What factors influence international competitiveness?

Answer 3

1) Unit labour costs
- if higher in 1 country than competitors then goods and services less competitive
2) Productivity
- if higher in 1 country than competitors then goods and services more competitive
- affected by: amount and quality per worker, quality of human capital and effectiveness of management
3) Real exchange rate
4) Labour taxes/ subsidies
- employers’ NI contributions regarded as tax on jobs
- could reduce competitiveness of country’s goods and services
- in contrast, job subsidies may increase competitiveness
e. g UK Employers Subsidy provides assistance for 6 months to firms taking on workers 18-24
5) Gov. laws and regulations
- incl. environmental and health and safety regulations
- employment protection anti-discriminatory laws
- NMW and compulsory employer NI contributions
6) Research and development (R&D)
- country which engages in significant amount more likely to lead to technological advances
- dramatic effects on productivity and competitiveness
7) Education and training influencing levels of:
- human capital
- infrastructure

Question 4

What is the real exchange rate?

Answer 4

Refers to how much the goods & services in domestic country can be exchanged for goods & services in a foreign country

• nominal exchange rate adjusted for changes in P.Ls between countries
• (nominal exchange rate x domestic P.L) / foreign P.L

Question 5

How does the real exchange rate effect international competitiveness?

Answer 5

Fall in real exchange rate (due to fall in nominal exchange rate) = increase in competitiveness of a country’s goods
- P of goods abroad rise relative to Ps in country

Question 6

What measures can firms use to increase competitiveness?

Answer 6

1) I in new capital equipment to raise productivity
2) Improve design & quality of their products through R&D
3) Training education

Question 7

What measures can governments use to increase competitiveness?

Answer 7

1) Supply side policies:
- occupational mobility
- education and training
2) Macroeconomic stability
e. g low and; stable inflation rate. sound public finances, relatively stable exchange rate, steady E.G
3) Public sector reform aimed at reducing red tape
4) Gov. expenditure to improve infrastructure
5) Privatisation
6) Incentives for I
e. g tax breaks if companies use profits for I rather than distribution to shareholders
7) Currency depreciation
- dif. in practice for country under floating exchange rates
- cut IR’s but many countries this at hands of Central Bank rather than gov.
8) Protectionism
- may not be realistic as may be against rules of WTO/ trading bloc to which country belongs

Question 8

What is the significance of international competitiveness?

Answer 8

1) Improvement in c.a BoP
2) Reduction in unemployment
3) Increase in E.G as an increase in X’s has multiplier effect on national income