4.1.9 International Competitiveness

• International competitiveness refers to how well a country's products compete in international markets
  • Competitiveness can change over time
    
    
• In order to make a comparison between the competitiveness of two countries, two metrics are commonly used

1. Relative unit labour costs: the total wages in an economy divided by output. This provides a number that indicates the labour costs for each unit of output produced. It is then possible to look at the relative unit labour cost for the UK compared to France. If it is lower than the UK is more competitive in the international market
   
   
2. Relative export prices: monitoring export prices provides insight into whether they are rising or falling over time. If they are rising in the UK relative to other countries, then the UK is becoming less competitive. If they are falling in the UK, it is becoming more competitive
   
   

• When considering factors that influence international competitiveness, the word relative is important
  • If inflation is happening at an equal rate in all competitor nations, there will be little change to the level of competitiveness
  • However, if it increases more in the UK relative to its competitors, then the UK competitiveness in international markets will decrease
    
    

Factors Influencing International Competitiveness

Factor	Explanation
Relative unit labour costs	A rise in productivity levels of UK workers, relative to their competitors, will lower the production cost per unit & increase competitiveness A decrease or stagnation in productivity, relative to their competitors, will worsen competitiveness
Relative wages & non-wage costs	Increases in labour costs, relative to other countries, are likely to make exports more expensive as the costs of production have increased resulting in a worse level of competitiveness Increases in non-wage costs such as pensions or social security taxes paid by the employer are likely to reduce output or raise costs of production, thus making exports less competitive Decreasing wage & non-wage costs have the opposite effect
Relative rate of inflation	Inflation raises the price of goods/service in an economy If inflation increases in the UK, relative to other countries, then foreign buyers pay more for the exports they purchase & this worsens competitiveness Decreasing inflation has the opposite effect
Relative level of regulation	Government regulation tends to raise costs of production as it sets standards/requirements that firms have to meet Increased costs of production mean that export prices are likely to rise & competitiveness will worsen Deregulation may have the opposite effect

Benefits of International Competitiveness

1. Export led growth: An increase in exports generates an increase in economic activity resulting in economic growth
2. Unemployment decreases: Economic growth leads to an increase in employment, incomes & wage growth
3. Current account surpluses: exports are likely to be greater than imports & the government does not have to concern itself with difficult policy decisions aimed at reducing a large deficit
4. Increased overseas foreign direct investment (FDI): It provides finance for firms to invest in overseas assets which in the long-term means they are able to increase their income & profit
5. Standards of living improve: as incomes tend to rise with economic growth, households gain purchasing power & access to a wider variety of goods/services
   
   

Problems Caused by Being Internationally Uncompetitive

• In many ways, the problems of being uncompetitive are the reverse of the above. The following point is worth highlighting

1. Government policies: with a current account deficit & a lack of international competitiveness, governments will focus more of their resources on gaining ground. E.g. more spending on supply-side policies. Any policy action creates opportunity costs & trade-offs