International Competition

• What are the four measures of international competitiveness

  1) Export prices

  2) Unit labour costs

  3) Global competitiveness index (GCI)

  4) Terms of trade
• How can export prices be used as a measure of international competitiveness?

  If a country has low export prices, foreign consumers are more likely to buy its exports meaning the country is more competitive
• How can unit labour costs (ULC) be used as a measure of international competitiveness?

  A ULC tells us the average amount spent on wages per unit of output. A lower unit labour cost means the supply in the economy would increase, increasing SRAS this will therefore decrease prices and increase international competitiveness.

  
  

  An increase in productivity will increase output, lower unit labour cost and decrease prices. An increase in human capital can also increase output, decrease ULC and decrease prices.

  
  

  However, a rise in minimum wage may increase ULC and increase prices
• How can the GCI be used as a measure of international competitiveness?

  The GCI is a measure of international competitiveness annually calculated by the world economic forum and considers 5 things:

  1) Costs and prices

  2) Infrastructure

  3) Health

  4) Education

  5) Technology

  All of these factors determine both the price and quality of exports and is measured using competitiveness ratings, a higher rating means increased competitiveness

  E.g. Benin is 3.47 and India is 4.59 so India is more competitive

  Things such as costs, innovation and policies can affect the GCI ranking
• How can Terms of Trade help measure international competitiveness

  Can be used to look at price competitiveness. A deterioration in the ToT could imply that export prices are falling which implies increased competitiveness
• What can influence international competitiveness

  1) Exchange rates

  2) Wage costs

  3) Non-wage costs

  4) Supply-side policies
• How can exchange rates influence international competitiveness

  SPICED - expensive exports, reduced competition

  WIDEC - cheaper exports, increased competition
• How can wage costs influence international competitiveness?

  Wages are a variable cost so as output rises, demand for labour rises so wage costs increase, increasing AC and reducing SRAS. increased minimum wage can also increase costs. An increase in costs will increase prices and reduce competitiveness.
• How can non-wage costs influence international competitiveness?

  Regulations: loose health & safety regulations lead to lower costs of production, this shifts SRAS to the right. As a result, prices will decrease and international competitiveness will increase whereas in countries with high health & safety regulations such as the UK and Germany will have high costs of production leading to an increase in prices and a decrease in competitiveness.

  
  

  Pensions: A pension scheme increases costs for firms which decreases SRAS and increases prices. This will reduce competitiveness (e.g. in the UK and Australia). No pensions will lower costs, lower prices and increase competitiveness

  
  

  Taxes: High taxes such as corporation tax will increase costs for firms and increase non-wage costs. This leads to an increase in prices and a decrease in competitiveness. If corporation tax is lower, firms retain more profits and can utilise dynamic efficiency to decrease LR costs, decreasing prices and increasing competitiveness
• How can supply side policies influence international competitiveness?

  Supply-side policies aim to increase AS

  Can help control inflation - increases competitiveness.
• What are the advantages of international competition?

  1) Current account surplus

  Ev: to some extent; how big is the surplus, how long does it last

  2) International investments - firms can utilise the current account surplus to invest overseas and build up assets on which can earn interest, make them profits and they can receive dividend payments

  3) Attract FDI - transfer of knowledge, skills and technology to domestic firms will make them more competitive

  4) Increased employment

  5) Wage growth - benefits developing countries more as there is increasing demand for exports, increased demand for goods will increase demand for labour and increase wages

  6) Increased domestic purchasing power
• What are the disadvantages of international competition?

  1) Low and middle income countries can lose wage competitiveness with economic growth and development if wages in developed countries become too high

  2) Over reliance on exports

  3) Economic growth will lead to increased inflation and domestic pries which could have a negative impact on competitiveness

  4) Surplus on the current account will lead to a rise in the exchange rate (SPICED)

  5) Protectionism may be used to protect domestic industries