4.1.9 International Competitiveness

Question 1

4.1.9a
Measures of International competitiveness

Answer 1

• relative unit labour costs
• relative export prices

Question 2

4.1.9a
Relative unit labour costs

Answer 2

• total labour costs + real output
• ↑ RULC (UK wages per unit output) → production costs ↑ → export prices ↑ → export competitiveness ↓ → international competitiveness ↓
• ↓ RULC → production costs ↓ → export prices ↓ → export competitiveness ↑ → international competitiveness ↑

Question 3

4.1.9a
Relative export prices

Answer 3

• ↑ UK export prices relative to competitors = exports more expensive = export demand ↓ = competitiveness ↓
• ↓ UK export prices relative to competitors = exports cheaper = export demand ↑ = competitiveness ↑

Question 4

4.1.9b
Factors Influencing International Competitiveness

Answer 4

• Exchange Rates
• Hedging
• Imported Inputs
• Productivity
• Infrastructure
• Wages and Non-Wage Costs
• Quality
• R&D
• Taxation

Question 5

4.1.9b
Factors Influencing International Competitiveness : Exchange Rates

Answer 5

↑ £ (appreciation) → UK exports costlier abroad → export demand ↓ → competitiveness ↓
↓ £ (depreciation) → UK exports cheaper abroad → export demand ↑ → competitiveness ↑
Effect size depends on PED of exports (inelastic demand → smaller effect)

Question 6

4.1.9b
Factors Influencing International Competitiveness : Hedging

Answer 6

Firms lock exchange rates → exchange rate risk ↓ → cost certainty ↑ → investment/planning ↑ → competitiveness ↑

Question 7

4.1.9b
Factors Influencing International Competitiveness : Imported Inputs

Answer 7

↑ £ → cost of imported inputs ↓ → production costs ↓ → export prices ↓ → competitiveness ↑
↓ £ → imported input costs ↑ → production costs ↑ → export prices ↑ → competitiveness ↓

Question 8

4.1.9b
Factors Influencing International Competitiveness : Productivity

Answer 8

↑ Productivity (output per worker) → cost per unit ↓ or quality ↑ → prices ↓ or value ↑ → competitiveness ↑

Question 9

4.1.9b
Factors Influencing International Competitiveness : Infrastructure

Answer 9

Infrastructure quality ↑ → transport & communication costs ↓ → efficiency ↑ → costs ↓ → competitiveness ↑
Infrastructure ↑ → labour mobility ↑ → labour supply ↑ → wages ↓ → costs ↓ → competitiveness ↑

Question 10

4.1.9b
Factors Influencing International Competitiveness : Wages and Non-Wage Costs

Answer 10

↑ Wage/non-wage costs relative to competitors → production costs ↑ → prices ↑ or profits ↓ → competitiveness ↓
↓ Wage/non-wage costs → costs ↓ → prices ↓ or profits ↑ → competitiveness ↑

Question 11

4.1.9b
Factors Influencing International Competitiveness : Regulation

Answer 11

↑ Regulation → compliance costs ↑ → production costs ↑ → prices ↑ → competitiveness ↓
(But some regulations → safety & motivation ↑ → productivity ↑ → possible competitiveness ↑)

Question 12

4.1.9b
Factors Influencing International Competitiveness : Quality

Answer 12

↑ Product quality → consumer willingness to pay ↑ → prices ↑ without losing demand → competitiveness ↑

Question 13

4.1.9b
Factors Influencing International Competitiveness : R&D

Answer 13

↑ R&D → innovation ↑ → product quality ↑ and/or production costs ↓ → competitiveness ↑

Question 14

4.1.9b
Factors Influencing International Competitiveness : Taxation

Answer 14

↓ Corporation tax → investment ↑ → innovation ↑ → competitiveness ↑
↑ Corporation tax → investment ↓ → competitiveness ↓

Question 15

4.1.9c
Benefits of International Competitiveness

Answer 15

• Competitiveness ↑ → exports > imports → current account surplus ↑ → fewer external constraints → economic stability ↑
• Competitiveness ↑ → FDI inflows ↑ → jobs ↑ + technology transfer ↑ → domestic productivity ↑ → competitiveness ↑
• Exports and FDI ↑ → employment ↑ → income ↑ → consumer spending ↑ → aggregate demand ↑ → economic growth ↑
• Economic growth ↑ → incomes ↑ → consumer purchasing power ↑ → living standards ↑

Question 16

4.1.9c
Problems of International Competitiveness

Answer 16

• Economic development ↑ → wages ↑ → unit labour costs ↑ → competitiveness ↓
• Demand for land/materials ↑ → input costs ↑ → production costs ↑ → competitiveness ↓
• Current account surplus ↑ → currency demand ↑ → currency appreciates ↑ → export prices ↑ → competitiveness ↓
• Growth ↑ → worker demands and regulations ↑ → costs ↑ → competitiveness ↓
• Costs ↑ → FDI may relocate ↓ → jobs ↓ → economic harm ↓ → competitiveness ↓