International Macroeconomics

• Twelve pillars of competitiveness

  12 different factors used to measure the competitiveness of a country such as infrastructure, health and skills
• International (external) competitiveness

  the ability to sell goods and services at competitive prices in a foreign country. Includes cost and non-price competitiveness
• Cost (price) competitiveness

  differences in unit costs between producers- eventually reflected in the market prices for goods and services
• Non-price competitiveness

  Encompasses technical factors such as product quality, design, reliability, performance
• Factors affecting price/ cost competitiveness

  Relative unit labour costs- wages, pensions, sick pay

  Costs of factors of production

  Costs of meeting regulations

  Planning permission costs

  Transport costs

  Employment protection laws and health and safety laws
• Non-price competitiveness factors

  Levels of investment, technology, quality standards, government regulations eg health and safety standards, quality of infrastructure
• Gross fixed capital formation

  refers to the net increase in physical assets (investment minus disposals) within the measurement period. Does not account for depreciation of fixed capital or land purchases
• Terms of trade index

  The volume of exports needed to buy a given volume of imports. Represents the value of imports of a country, relative to the value of its imports
• TOT equation

  Terms of trade index= index of export prices/ index of import prices x100
• TOT favourable movement

  TOT increases- export prices rise relative to import prices. Country can buy more imports for given volume of export. Yet reduces international competitiveness worsening balance of trade
• TOT unfavourable movement

  If TOT decreases, so export prices are falling relative to import prices. Country can buy less imports with export revenue.

  Increases international competitiveness so improves balance of trade
• Factors affecting TOT

  Exchange rate- depreciation deteriorates TOT

  Competitiveness of firms- reduced productivity and increased costs improves TOT

  Relative inflation eg higher inflation improves TOT

  Global commodity prices- eg increased oil price increases TOT for exporters
• Evaluation of TOT and BOP

  Depends on PED- Marshall Lerner

  Depends on cause of improvement

  eg increased demand for exports increasing TOT will improve balance of trade

  increased costs eg inflation increasing TOT worsens balance of trade
• Balance of payments imbalances

  Surpluses and deficits within the BOP eg in different sections of BOP- current, financial and capital

  Balanced when inflows= outflows
• Causes of current account imbalance

  High levels of consumption (fuelled by credit) increasing imports

  High investment (importing capital goods)

  High FDI leading to outflow of profits

  Change in comparative advantage causing change in imports/ exports

  Overvalued exchange rate causing consumers to switch to those abroad

  Undervalued exchange rate increasing demand for exports

  Structural weaknesses/ strengths- affecting competitiveness
• Types of current account deficits/ surpluses

  Structural- due to changes in domestic investment, unit labour costs, productivity

  Cyclical- recession or boom
• Problems of current account deficit

  Unless exchange rate cab depreciate, need to run a surplus on other sections

  Government borrowing- increases international debt

  private sector borrowing- borrowing from foreign banks for buying imports

  inflows of FDI- causes further outflows eg profits

  inflows of hot money- more expensive to borrow so negative impact on AD

  inflow of portfolio investment- financial markets not developed in LEDCs- if confidence falls, have negative wealth effect