international competitiveness 4.1

Question 1

What is competitiveness?

Answer 1

External competitiveness is the sustained ability of a country’s businesses to sell goods and services profitably at competitive prices in overseas markets.

Question 2

what is the core measure of competitiveness

Answer 2

a nation’s relative unit labour costs expressed in a common currency such as the US $ or the Euro.

Question 3

Price (or cost) competitiveness:

Answer 3

• Key measure: Differences in relative unit labour costs (ULCs).

Question 4

Non-price competitiveness:

Answer 4

• Key aspects are: Product quality, innovation, design, reliability and performance, choice, after-sales services, marketing, branding, brand loyalty and the availability and cost of replacement parts.

Question 5

Non-wage cost factors for businesses operating in international markets include:

Answer 5

1. Environmental taxes e.g. minimum prices on carbon emissions.
2. Employment protection laws & health and safety regulations.
3. Statutory requirements for employer pensions.
4. Employment taxes e.g. employers’ national insurance costs in the UK or payroll taxes in other countries.

Question 6

Unit labour costs =

Answer 6

total labour costs / total output

Question 7

Unit labour costs are determined mainly by:

Answer 7

1. Average wages / salaries in a country’s labour market – one measure tracked is the hourly labour cost of
   employing people in the labour market.
2. Labour productivity i.e. output per person employed or output per hour worked.

Question 8

Unit labour costs will tend to

Answer 8

rise over time when wages are rising faster than productivity.

Question 9

Relative unit labour costs will rise when:

Answer 9

o A country’s exchange rate appreciates.
o Wage costs rise relatively faster than other nations.
o Labour productivity growth is relatively slower.

Question 10

Options for reducing relative unit labour costs

Answer 10

o Monetary policy interventions aimed at a currency depreciation e.g. a managed floating exchange rate.
o Wage controls e.g. wage/pay freezes for people working in the public (state) sector.
o Supply-side measures designed to raise labour productivity / efficiency across many industries.

Question 11

Relative export prices will rise when

Answer 11

1. There is an appreciation of the currency – causing export prices in overseas markets to rise.
2. There is a period of high relative inflation in one country compared to others – again this tends to make exports appear more expensive when priced in an overseas currency.
3. When export businesses experience higher costs e.g. arising from environmental taxes, increased minimum wages which leads them to raise price to protect their profit margins. 4. When exporters of goods and services are hit by import tariffs.

Question 12

Policies to improve competitiveness part 1

Answer 12

1. Competitive exchange rate – perhaps involving moving to a managed floating currency.
2. Competitive tax environment to attract inward investment and encourage new business to start up.
3. Investment in human capital to improve the quality of the workforce.
4. Increased research & development to drive a faster pace of innovation.

Question 13

Policies to improve competitiveness part 2

Answer 13

5. Stronger market competition to raise factor productivity and lower relative export prices.
6. Stable macroeconomic environment e.g. maintaining low inflation with steady economic growth to support business confidence and investment.
7. Investment in critical infrastructure such as better road, air and rail links, improved ports, faster broadband and fast fibre-optic internet connections.

Question 14

In short, innovation requires

Answer 14

strong human capital, institutions and incentives.

Question 15

Fiscal policy and international competitiveness

Answer 15

1. Subsidies to lower the cost of research e.g. in pharmaceuticals, life sciences, robotics and artificial intelligence.
2. Tax incentives can encourage the commercialisation of ideas e.g. ideas coming out of universities.
3. Lower employment taxes to stimulate skilled migration from overseas.
4. Lower capital gains taxes encourage small businesses / start-ups.
5. Special economic zones (SEZ) to attract research-intensive businesses.

Question 16

Macro competitiveness has important micro foundations: LR c

Answer 16

o Competitive markets and innovative businesses.
o Skills, aptitudes and attitudes within a diverse workforce.
o Expanding opportunities for female entrepreneurs /refugees.

Question 17

Competitive advantage comes from having: LR c

Answer 17

o Globally scaled businesses close to or at the technological frontier.
o A culture of innovative business start-ups / social entrepreneurs.
o A financial system that can provide appropriate and affordable credit for education, business research and funding for business expansion.

Question 18

Reliance on currency depreciation / devaluation and wage cuts is not a sustainable competitiveness strategy: LR c

Answer 18

o The most competitive countries tend to have the highest minimum wages.
o There is a continuous global battle for the most talented, highly skilled workers.
o “Races to the bottom” e.g. in tax rates and wages have a limited impact in the long run.

Question 19

Internal devaluation happens when

Answer 19

a country seeks to improve price competitiveness through lowering wage
costs and increasing productivity and not reducing the external value of their exchange rate.

Question 20

An internal devaluation requires

Answer 20

several years of low relative inflation i.e. a country’s inflation rate lower than price increases in other countries.

Question 21

Internal devaluation can be brought about by

Answer 21

fiscal austerity (via higher taxes and cuts in government spending) and/or a sharp rise in real interest rates – both impose deflationary pressure on output & prices.

Question 22

An external devaluation happens when

Answer 22

a country operating 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.

Question 23

Evaluation: Risks from an internal devaluation

Answer 23

1. Severe loss of output and rising unemployment
2. Fall in nominal wages reduces living standards
3. Risks from sustained price deflation
4. Real value of debt increases
5. Danger of a country suffering a permanent loss of output (known as “hysteresis”)

Question 24

Evaluation: Drawbacks from an external devaluation:

Answer 24

1. Increase in cost-push inflation from higher import prices
2. Reduces real incomes because of a rise in inflation
3. No guarantee that the trade deficit will improve (refer to the J Curve concept+Marshall Lerner condition)
4. Foreign creditors will demand higher interest rates on new issues of government & corporate debt 5. Currency uncertainty makes country less attractive to inward FDI

Question 25

Benefits of international competitiveness

Answer 25

o Improved living standards e.g. measured by real GNI per capita (PPP). o Stronger trade performance from an increase in export sales.
o Virtuous circle of economic growth.
o Employment creation.
o Higher government tax revenues as incomes and profits increase.

Question 26

factors influencing international competitiveness

Answer 26

• exchange rates
• productivity
• regulation
• investment
• taxation
• inflation
• economic stability

Question 27

benefits of competitiveness

Answer 27

• current account surpluses
• attract foreign investment
• employment increases
• possibly higher wages as derived demand for labour
• economic growth from supply side (efficiency) and demand (net trade)

Question 28

negatives of international competitiveness

Answer 28

• can easily be lost
• over reliance?
• CA surplus = rise in ER = less competitive
• may be more dependent on overseas demand -> vulnerable to shocks