4.1.9 International Competitiveness

INTERNATIONAL COMPETITIVENESS DEFINITION

• ability of a country to sell its g or s abroad

MEASURES OF INTERNATIONAL COMPETITIVENESS

• relative unit labour costs

• relative export prices

RELATIVE UNIT LABOUR COSTS AS A MEASURE

• total wages divided by real output (cost for employing workers for each unit of good)

• generally, cheaper relative unit labour costs = country is more competitive in manufacturing as lower prices

• but higher prices can compete if a niche market is targeted, product is differentiated or good has better quality (non-price competitiveness)

RELATIVE EXPORT PRICES AS A MEASURE

• price of exports of one country compared to other countries

• rise in relative export prices means UK export prices have risen more than other countries’ export prices so UK has become less competitive

FACTORS INFLUENCING INTERNATIONAL COMPETITIVENESS

• exchange rates

• productivity

• regulation

• investment

• taxation

• inflation

• quality

• openness to trade

EXCHANGE RATES

• rise in pound → SPICED → reduces international competitiveness

PRODUCTIVITY

• rise in productivity → reduce relative unit labour costs → reduce X prices → improve international competitiveness

REGULATION

• high levels of regulation → increase costs → increase X prices → reduce international competitiveness

INVESTMENT

• investment in infrastructure → faster production and deliveries → increases productivity → decrease X prices → more internationally competitive

• investment into R&D → new products → more internationally competitive

• investment into tech → improve efficiency → lower cost → more internationally competitive

TAXATION

• high levels of taxation → lower high costs → high prices → less internationally competitive

INFLATION

• high levels of inflation → suggests unit costs higher due to high COP → high X prices → reduce international competitiveness

QUALITY

• lots of good quality FOPs → better quality goods → more internationally competitive

OPENNESS TO TRADE

• low protectionist barriers → cheaper to export → more internationally competitive

BENEFITS OF COMPETITIVENESS

• improve current account balance→ can invest overseas and build up a surplus of assets overseas → earn profit

• attract inflows of FDI → can create jobs + lead to a transfer of knowledge, skills and technology to firms

• employment likely to increase because more goods are being produced, since more goods are exported and less are imported, so more are sold internationally and domestically

• economic growth- both by supply side improvements due to efficiency and investment and by demand side relating to X-M

PROBLEMS OF COMPETITIVENESS

• easily lost- developing countries who benefit from lower costs of labour and materials could see this eroded when they experience export led growth due to their competitiveness → current account surplus may lead to a rise in the exchange rate → reduce competitiveness

• less competitive countries may implement trade barriers to protect domestic industries

• countries who are competitive are more interdependent → more vulnerable to external shocks