4.1.9 International Competitiveness Flashcards
(22 cards)
What is external competitiveness
Is the sustained ability to sell goods and services profitably at competitive prices overseas
What is price competitiveness
Key measure: Differences in relative unit labour costs (ULCs)
What is non-price competitiveness
Key aspects: Product quality, innovation, design, reliability and performance, choice, after-sales services, marketing, branding, brand loyalty and the availability and cost of replacement parts
What are 4 Non-wage costs
- Environmental taxes
- Employment protection law & health and safety regulation
- Statutory requirements for employers
- Employment taxes
What are Unit Labour Costs (Price Competitiveness)
- Are labour costs per unit of output
- Unit labour costs = total labour costs/total output
Unit labour costs are determined mainly by:
- Average wages/salaries in a country’s labour market
- Labour productivity - output per hour worked
Does Unit Labour Costs increase or decrease when wages are rising faster than productivity
Increase
Relative unit labour costs will rise when:
A country’s exchange rate appreciates
Wage Costs rise relatively faster than other nations
Labour productivity growth is relatively slower
How to reduce relative unit labour costs
- Monetary policy interventions aimed at a currency depreciation e.g. managed-floating exchange rate
- Wage control - pay freezes
- Supply-side measures designed to raise labour productivity
What are relative export prices
are one country’s export prices in relation to other countries, usually expressed as an index
When will relative export prices rise
- appreciation of the currency – causing export prices to rise
- period of high relative inflation in one country - makes exports more expensive
- export businesses experience higher costs - leading them to raise prices
- exporters of goods/services are hit by import tariffs
What type of things are included on the annual Global Competitiveness Index published by the World Economic Forum (WEF)
- Effectiveness of institutions
- Quality of infrastructure
- Macroeconomic performance
- Health and primary education
- Higher education and training
- Efficiency of good/labour markets
- Technological readiness
- Sophistication of business
- Innovation
What policies could help improve competitiveness
- depreciating exchange rate
- Competitive tax - encourage new business start-ups
- Investment in human capital
- Research and development
- Investment in infrastrucutre
Fiscal policy and international competitiveness
- Subsidies to lower cost of research and development
- tax insensitive - to encourage entrepreneurship
- Lower employment taxes
- special economic zones
What are the advantages of being internationally competitive
- Improved living standards
- Stronger trade performance from increased export sales
- economic growth
- Employment
- Gov tax revenues
Problems with international competitiveness
- May cause a protectionist reposnse from other country’s
- Demand-pull inflation
- Unequal growth and inequality
- Poor work-life balances
- might cause exchange rate to depreciate
What is an internal devaluation
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
can be brought about by fiscal austerity (via higher taxes and cuts in government
spending) and/or a sharp rise in real interest rates
What type of country would use internal devaluation
several years of low relative inflation
more likely to happen with a country that has a fixed exchange rate
What is 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
Why might a country carry out external devaluation
One motivation is to make exports more price-competitive in overseas markets and to make imports relatively more expensive than domestic supply
aims might include reducing the size of a trade deficit and also cutting the real value of money.
In theory, currency devaluation is a fast way of improving price competitiveness than an internal devaluation.
What are the risks from an 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
What are the risks of 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 (refer to the J Curve concept)
- Foreign creditors will demand higher interest rates on new issues of government & corporate debt
- Currency uncertainty makes a country less attractive to inward FDI
