Macro 17 - International Competitiveness

Question 1

Define the term international competitiveness

Answer 1

International competitiveness is a measure of a country’s ability to sell its products in international markets, usually determined by the price factors and non-price factors such as quality

Question 2

What are the two ways of measuring international competitiveness?

Answer 2

• Relative unit labour costs
• Relative export prices

Question 3

What are relative unit labour costs?

Answer 3

Relative unit labour costs are the total labour costs of supplying goods and services per unit of output in comparison to another country. These are often expressed as an index

Question 4

What are relative export prices?

Answer 4

Relative export prices are the prices of a country’s exports compared to the prices of exports of a country’s main trading partners expressed as an index

Question 5

What would a rise in a country’s export prices compared to other countries suggest about its competitiveness?

Answer 5

A rise in a country’s export prices compared to other countries would suggest a loss in competitiveness

Question 6

What are the factors affecting international competitiveness?

Answer 6

• Relative unit labour costs
• Regulation
• Taxation
• Quality of products and services
• The relative rate of inflation
• Exchange rates

Question 7

What is the real exchange rate?

Answer 7

The real exchange rate is the nominal exchange rate adjusted to reflect the different inflation rates of the currencies concerned

Question 8

What is the real exchange rate a combination of?

Answer 8

The real exchange rate is a combination of the relative rate of inflation and the exchange rate

Question 9

What is the real exchange rate useful for considering?

Answer 9

It is useful for considering the competitiveness of a country that has a fixed exchange rate

Question 10

What is the formula used to calculate the real exchange rate?

Answer 10

Real exchange rate = nominal exchange rate * price level in a country / price level abroad

Question 11

What are the benefits of being internationally competitive?

Answer 11

• A surplus or reduced deficit on the current account
• Export led growth increasing aggregate demand and real GDP. This may lead to a multiplier effect
• Low levels of unemployment as there is higher derived demand for labour due to demand for exports
• Higher tax revenues for the government

Question 12

What are some the of the disadvantages of being internationally competitive that come as a result of the benefits?

Answer 12

• There is the difficulty of maintaining low wages. As GDP an incomes rise workers are likely to demand higher incomes to access a higher standard of living
• An improved current account surplus led by a rise in exports is likely to lead to a rise in demand for the currency and therefore strengthen it. This will make it more difficult to maintain price competitiveness in international markets
• Export-led growth could be inflationary

Question 13

What are the problems of not being internationally competitive?

Answer 13

• There will be an increase in unemployment
• There will be a current account deficit
• There will be a depreciation in the country’s exchange rate due to low demand for the country’s products which can make imports more expensive and lead to imported inflation.

Question 14

What are some policies that can be used to increase international competitiveness?

Answer 14

• Buy foreign currency on the foreign exchange markets
• Decrease interest rates
• Reduce wage costs
• Cut corporation tax rates
• Education and training schemes
• Government spending on infrastructure
• Privatisation and deregulation