International Competitiveness

• International competitiveness is the measure of the relative cost and value of a country's exports
• International competitiveness is determined by:

  
  

  Short Run - Inflation and exchange rate

  
  

  Long Run - Education, healthcare, institutions, level of corruption and macroeconomic environment determining the productivity and quality of goods that firms produce
• Real exchange rate = Nominal rate X ratio of relative prices
• Competitiveness can be measured in a number of ways such as Relative export prices and nominal exchange rate
• A country's terms of trade is the index of the ratio of a country's export and import prices
• Labour productivity is usually expressed GDP per worker and Unit labour costs are the cost of labour per unit of output
• The Current Account/BOP can be used as a guide to international competitiveness
• Relative Unit Labour costs measure the labour cost per unit of output and usually expressed in a common currency and index number format, it will rise when:

  • Country's exchange rate appreciates against other nations
  • Wage costs rise relatively faster
  • Labour productivity growth is slower than in other countries
• Non-price competitiveness refers to how well UK exports of branded goods and services do in overseas markets in aspects of competition not associated with price
• Examples of non-price competitiveness:

  • Product quality and design
  • Business R&D
  • Product reliability
  • Strength or weakness of local brands
  • Levels of productive and dynamic efficiency of firms
  • Levels of X-Efficiency
  • Effectiveness of economic and political systems
  • Investment in new technology
  • Investment in human capital
• When trying to decide the competitiveness of a country, the following factors should be considered:

  • Relative exchange rates/inflation rates
  • Productivity
  • Wage and non-wage costs
  • Labour market flexibility
  • Research and development
  • Regulation
• The benefits of improving international competitiveness are:

  • Relatively cheaper exports leading to higher demand for exports
  • Higher exports increase AD and economic growth
  • Improve current account deficit
  • Reduce inflation in the economy
  • Create jobs in the export sector
• Policies can be used to improve international competitiveness such as improving the functions of labour markets, investment into infrastructure, supporting enterprise and increasing macroeconomic stability