4.1.9 International competitiveness

• What is international competitiveness?

  Measures the cost of a country’s goods and services exports relative to those of other countries
• What is external competitiveness?

  The sustained ability to sell goods and services profitability at competitive prices in a foreign country 
• What are supply side policies?

  • Cost competitiveness
  • Differences In relative unit labour costs
  • Non price competitiveness
  • Product quality design, reliability and performance, choice, after sales service, marketing, branding, availability and costs of replacement parts
  • Non wage costs
  • Environmental taxes
  • Employment production laws and regulations
  • Statutory requirements for employee pensions
  • Employment taxes
• What are unit labour costs?

  Measures the average cost of labour per output 
• What is the equation for unit labour costs?

  Unit Labour Cost = Total Labour Costs / Real Output
• What are measures of international competitiveness?

  • Relative unit labour costs
  • Relative export prices
  • The Global Competitive Index (GCI)
• What are factors that influence the international competitiveness?

  • Unit labour costs
  • Increase in labour costs higher than the rise in labour productivity ay cause a decrease in competitiveness
  • Productivity
  • Real exchange rate
  • Labour taxes or subsidies
  • Government laws and regulations
  • Research and development
• What is the cause of the UK's lack of productivity?

  • Lack of investment
  • Banking crises
  • Lack of innovation
• What are strategies to improve competition?

  • Competitive exchange rate
  • Competitive tax environment
  • Investment in human capital
  • Increased research and development 
  • Market competition to raise productivity
  • Stable macroeconomic environment 
  • Investment in critical infrastructure and balanced growth
• What is a real exchange rate?

  Nominal exchange rate adjusted for changes in price levels between counties
• What is the equation for the real exchange rate?

  Real Exchange Rate = (Nominal Exchange Rate / Domestic Price Level) / Foreign Price Leve
• What does the real exchange rate do?

  • Takes into account relative price levels between countries, is a more accurate measure of a country's competitiveness
  • Can maintain competitiveness even with a stronger currency if it has higher productivity labour unit labour costs
• What is innovation?

  Drives progress and determines productivity growth in which in term drives prosperity
• What is the importance of innovation?

  • Research and development tax credits
  • Patent box initiative
  • Public research and development and more funding for higher development 
  • Higher skilled migrants policy
  • Nurturing an entrepreneurial culture
  • Increasing intensity of competition within markets
• What do the policies to improve international competitiveness aim to do?

  • Rebalance economy
  • Promote investment
• What are the policies to improve international competitiveness?

  • Government spending on infrastructure
  • Improve efficiency of business 
  • Easier to attract FDI
  • Tax incentives (lower corporation tax/income tax, tax allowance on investment)
  • More money to invest
  • Increase efficiency of business
  • Gives incentive for business to put more money aside to invest
  • Increase flexibility and size of labour force
  • Deregulation
  • Government spending on education (improve skills, apprenticeships)
  • Improve productivity driving down unit labour costs
• What are evaluation points to improve international competitiveness?

  • Cost - opportunity cost
  • No guarantee such policies will work 
  • Time lag
  • Targeted? 
  • Relative concept
• What are benefits to being internationally competitive?

  • An improvement in the current account of the balance of payments
  • A reduction in unemployment
  • An increase in economic growth because an increase in net exports will cause an increase in AD and have a multiplier effect in national income
• What are problems with being internationally competitive?

  • A deficit on the current account of the balance of payments
  • An increase in unemployment
  • A depreciation in the country’s exchange rate, leading to an imported inflation