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Flashcards in International Competitveness Deck (11):

Factors that determine international competitiveness

- Relative inflation
- Productivity - output per worker
- Exchange Rate
- Tax


Relative inflation

- If the inflation rate is relatively lower than other countries, then over time you become more competitive because your goods are increasing at a slower rate
- e.g. Post war period, Japan and Germany had relatively low inflation than major competitors, this helped them became more competitive


Productivity - output per worker

- Most common, labour productivity
- With improved technology and education, a country can enjoy higher labour productivity and therefore produce goods at a lowe cost
- Higher labour productivity is the key to increasing competitiveness and living standards at the same time


Exchange rate

- Movment in the exchange rate will determine competitiveness
-e.g. A sharp depreciation will make exports cheaper and more competitive. An increase (appreciation) in the exchange rate, makes the foreign currency price more expensive

- Movements in the exchange rate reflects relative costs
-e.g. If a country has lower inflation it will lead to an appreciation in the exchange rate, making exports relatively more expensive. Thus a floating exchange rate helps maintain competitive levels

- Some economies can artificially maintain a lower value of the exchange rate maintain competitiveness
E.g. China buys large quantities of US securities, this causes the dollar to increase and the yuan undervalued. Therefore China's exports more competitive and explains the large Chinese current account surplus



Tax rates on labour and corporations will be a factor in determining competitiveness
- e.g. Higher labour taxes will increase the unit costs of labour faced by firms, leading to lower competitiveness


Firms can increase their international competitiveness by

- Incorporating the latest technology into investment
- Product innovation
- Relocating to where labour costs are lower
- Rationalisation output to get rid of high cost plants


Incorporating the latest technology into investment

Increase efficiency of productivity of labour


Product innovation

- Making a better product and create demand
- Better products lead increase competitiveness
- Creates new dew and making consumers believe they need it


Relocating to where labour costs are lower

- could be international (offshoring) or in the UK
- e.g. Predentured call centre in Scotland selling pensions but head office in London


Rationalisation output to get rid of high cost plants

- firms shut down their less efficient factories
- e.g. Bosh closed production in Wales and move to Poland


Government's rate to improve international competitiveness

- Improve the skill base
- training, education and apprenticeship
- Reduce interest rates to stimulate AD
- Deregulation to promote competition
- allows new entrance = decrease prices
- reduce tax rate to stimulate enterprise, effort and investment
- Promote competition between firms
- Reduce monopoly power
- Improve economics infrastructure
- e.g. Roads, transport links enables ports and finished goods to be delivered = more competitive