International Competitiveness

International Competitiveness

1. A country's ability to sell its goods and services in domestic and international markets at an attractive price and quality.

   • Quality could mean price or factors like quality, design reliability and availability.

2. Measures of int. competitiveness

   • Relative unit labour costs; labour costs between countries are converted into a single currency and expressed as an index number.
   • Relative productivity measures; output per hour worker.
   • Indices like the WEF global competitiveness index.
     • Market size
     • Infrastructure
     • Macroeconomic stability
     • Innovation
     • Higher education and training
     • 1. Switzerland 2. Singapore 3. USA.

3. Factor influencing international competativeness

   • Real exchange rate
     • Nominal exchange rate x domestic price level ------------------------------- foreign price level
     • There will be a depreciation in the real exchange rate if the nominal exchange rate falls or the foreign price level rises. This will increase competitiveness
     • There will be an appreciation in the real exchange rate if the nominal exchange rate rises or the UK price level rises above the foreign price level. This will reduce competitiveness
   • Wage and non-wage costs
     • Wages are the most important costs for many industries. If wages are higher in the UK than China, their goods are likely to be more expensive
     • Non-wage costs include national insurance, health & safety regulations, pension schemes and employment protection.
     • Wage and non-wage costs are often higher in developed countries, due to stringent employment laws.
   • Other factors
     • Labour productivity; output per worker per hour worked
     • Human capital; influenced by education and training
     • Amount of capital equipment per worker.
     • Research and development which leads to technological advances.
     • Infrastructure; roads, railways, telecommunications, energy and water.
     • Labour market flexibility; ease of hiring and firing workers, willingness to work part time or flexible hours and trade union strength.

4. Measures and policies to increase competitiveness

   • Firms can invest in new capital equipment to raise productivity, or improve the design and quality of their products through R&D.
   • Governments can use supply side policies
     • Educational and training schemes to increase occupational mobility.
     • Macroeconomic stability; low stable inflation, current account equilibrium, stable exchange rate, steady economic growth.
     • Public sector reform to reduce red tape.
     • Expenditure to improve infrastructure.
     • Privatisation
     • Incentives for investment like tax breaks.
   • International agreements prevent countries trying to increase their competitiveness with tariffs e.g. the UK has legal requirements as an EU member and the WTO rule out unjustifiable tariffs.
   • A country can fix it's exchange rate to make sure it's exports are cheap for other countries to buy, and they remain competitive. They can do this by buying dollars or GBP to increase demand for that currency and lower theirs in relation. They can also raise interest rates to restrict demand for the currency and depreciate it.
     • Stability and certainty.
     • Provides discipline for domestic producers to keep their costs down.
     • Reinforces gains in comparative advantage.
     • Inflation from higher cost imports may follow/
     • Harder to find foreign investment. Bond yields may go up, capital flight, hard to find purchasers of debt.
     • Risky for people who have borrowed in foreign currencies.
     • If their exports are price inelastic there will be a limited effect.
     • China has a fixed exchange rate. Since 1994 it pegged its Yuan at 8.28 to the $. In May 2014 it widened the band to 2%.
     • The UK cannot devalue its currency as it is floating and the BofE is independent and sets interest rates. The Euro is also floating and cannot be manipulated.

5. Significance; a fall in competitiveness will be reflected in the trade in goods balance of the balance of payments. This could cause unemployment, and a negative multiplier effect on GDP causing a reduction in growth.