International Competitiveness Flashcards
International Competitiveness
Is the ability of a nation to compete overseas and sustain improvements in real output and living standards.
Countries can compete with price and non-price competitiveness. For example, the quality of goods and services and the rate of innovation can change how competitive a country is.
Measures of International Competitiveness
Relative Unit Labour Costs
- Total Wages / Real Output
Eg if a firm employs 100 workers at £1000 each, its total wage bill would be £100,000. If these workers produced 50,000 units of output, unit labour costs are £2 per unit.
Relative Export Prices
This is the ratio of one countries export prices compared to export prices of their main trading partners, expressed as an index. The lower the relative export prices, the more competitive.
Terms of Trade
Global Competitveness
Factors Affecting International Competitiveness
Exchange Rates - this affects the price at which products are bought and sold internationally.
Productivity - Rises in productivity levels relative to its main trading partners will increase the countries competitiveness.
Wage and non-wage costs - if wage and non-wage costs such as company pensions or taxes on employment of workers, rise relative to to its main trading partners, then the UK will become less internationally competitive.
Regulation - Increases in regulation of industry tend to increase costs of production for firms. For example, UK firms tend to have lower costs than firms in France and Germany, due to regulation being lighter in the UK. Hence, less regulation is likely to increase international competitiveness.
Quality - Firms which produce better quality products than their international rivals will have a competitive advantage.
Research and Development - Research and Development influences the uniqueness of a product. The extent to which firms engage in research and development may influence their long-term international competitiveness.
Taxation - Low taxes on profit encourage investment and innovation, which leads to improved international competitiveness. High taxes on profits lead to deteriorating international competitiveness.
Advantages and Disadvantages of International Competitiveness
Pros
Current Account Surpluses
International Investment - a current account surplus gives the country the opportunity to invest overseas, and build up a surplus of assets overseas on which interest, profit and dividends can be earned.
Employment - More jobs are created
Economic Growth - Greater efficiency is likely to lead to higher economic growth. Greater demand for exports will lead to higher investment and will contribute to higher AD and LRAS.
Wage Growth - For developing countries, a major source of their international competitiveness might be low wages which allow for low costs of production. Being internationally competitive should lead to higher exports and greater demand for workers, as a result, driving wage rates up.
High Domestic Purchasing Power - Consumers in the economy are likely to benefit. First, their incomes are likely to rise faster because of higher economic growth. Second, they will be able to buy goods and services that are lower in price and more attractive to buy than if the country were less internationally competitive.
Cons
For low and middle-income countries, the competitive benefit of low wage costs are likely to be eroded as the country becomes more developed and wage rates rise at a relatively high rate.
Other costs, such as the price of land or the materials bought from other domestic firms, are likely to rise as a country becomes more developed. Again, this could erode international price competitiveness.
A current account surplus could lead to a rise in the exchange rate, making exports more expensive to foreign buyers and imports cheaper for domestic buyers. This erodes competitive advantage.
Less competitive foreign countries may impose trade barriers to protect their own less competitive industries. This will erode a country’s competitive advantage.
