4.1.9

• What is competitiveness

  External competitiveness is the sustained ability to sell goods and services profitability at competitive prices overseas.
• Non-wage cost factors include:

  • Environmental taxes e.g. minimum prices on carbon emissions
  • Employment protection laws and health and safety regulations
  • Statutory requirements for employer pensions
  • Employment taxes e.g. employers' national insurance costs
• Unit labour costs


  Unit labour costs are labour costs per unit of output. There is a simple formula for calculating unit labour costs:

  Unit labour costs = total labour costs / total output
• Internal devaluation


  Internal devaluation happens when a country seeks to improve price competitiveness through lowering their wage costs and increasing productivity and not reducing the external value of their exchange rate. An internal devaluation requires several years of low relative inflation i.e. a country's inflation rate lower than price increases in other countries.
• External devaluation


  An external devaluation happens when a country operating with a fixed or semi-fixed exchange rate system decides to deliberately lower the external value of their currency against one or a range of other currencies. A devaluation of the currency means a domestic currency buys less of a foreign currency.
• Risks from internal devaluation

  • Severe loss of output and rising unemployment
  • Fall in nominal wages reduces living standards
  • Risks from sustained price deflation
  • Real value of debt increases
  • Danger of a country suffering a permanent loss of output (known as "hysteresis")
• Drawbacks from an external devaluation

  • Increase in cost-push inflation from higher import prices
  • Reduces real incomes because of a rise in inflation
  • No guarantee that the trade deficit will improve
  • Foreign creditors will demand higher interest rates on new issues of government & corporate debt
  • Currency uncertainty makes country less attractive to inward FDI