Micro and Macro Methods to Increase International Competitiveness (Paper 3)

Question 1

Devaluation and Reduction in corporation tax

Definition of international competitiveness

Answer 1

International competitiveness refers to a country’s ability to produce goods and services that can compete globally, influenced by factors like productivity, costs, and innovation. To enhance competitiveness, both microeconomic measures (e.g., improving firm productivity and reducing market barriers) and macroeconomic measures (e.g., exchange rate policies and fiscal stability) can be implemented.

Question 2

Devaluation and Reduction in corporation tax

KAA1 (Macro-focused)

Answer 2

Knowledge: Investment in infrastructure (e.g., transport, energy, digital networks) improves productivity, reduces production costs, and enhances the overall business environment.

Application: The UK has made significant investments in projects like the HS2 high-speed rail and energy infrastructure (e.g., offshore wind farms) to improve connectivity and reduce energy costs for businesses.

Analysis: Better infrastructure reduces transportation and logistical costs, improves trade efficiency, and attracts foreign direct investment (FDI). This allows firms to be more competitive in global markets by reducing their cost base and improving efficiency.

Knowledge/Analysis: Devaluation of currency
Bank of England reduce interest rates-reduce cost of borrowing and reward for saving-reduction in hot money inflows-reduced demand for UK currency-reduction in the value of the pound
WPIDEC-UK exports are now more price competitive in international markets due to devaluation

Applicaiton:
Interst rates are currently at 4.5%

Question 3

Inflationary pressure and drawbacks of projects like HS2

Eval 1 (Macro)

Answer 3

Knowledge: Large infrastructure projects are expensive and may take years to complete, leading to opportunity costs in the short term. They can also face public resistance due to environmental concerns or local opposition.

Application: The HS2 rail project has faced significant public criticism due to its high cost and environmental impact, raising questions about its long-term economic benefits.

Analysis: Although infrastructure investment is critical for long-term competitiveness, the short-term costs, delays, and public backlash can reduce its effectiveness and undermine support for such projects.

Reduced interest rates-increased Marginal propensity to consume (MPC)-increased consumption 60-65% of UK AD-increased AD

AD/LRAS DIAGRAM

Will lead to demand pull inflation-domestic goods and services are more expensive-less price competitive in foreign markets

Devluation=increased import prices-

Application:
Post brexit-the pound sterling depreciated significantly

Question 4

KAA1 (Micro-focused)

Answer 4

Knowledge/Analysis
Reduction in corporation tax which is an expansionary fiscal policy)-increased retained profits for firms-increased finances able for reinvestment into R&D-increased dynamic efficiency and (technical E.O.S)

Application:
-Corporation tax is currently at 25% in the UK
-Better quality products such as the hoover industry, firms like Dyson, making more wireless hoovers