International Competitiveness

Specification Coverage: Edexcel unit 4.1.9 - International Competitiveness. Students should be able to define international competitiveness, explain how it is measured, analyse the cost and non-cost factors that influence it, and evaluate its significance for exports, growth, employment, the current account, and policy choices. These notes also cover unit labour costs and relative export prices as measures of competitiveness.

Definition and Measures

International competitiveness is the ability of a country's goods and services to compete successfully in global markets.

Key measures include:

Relative unit labour costs: Rising unit labour costs compared with competitors usually indicate weaker competitiveness.

\[ \text{Unit Labour Costs} = \frac{\text{Total Labour Costs}}{\text{Total Output}} \]

Relative export prices: Higher export prices compared with competitors usually indicate weaker competitiveness.

Worked Example: Comparing Unit Labour Costs

Two countries produce the same good. Unit labour cost is total labour cost divided by total output:

Country Total labour costs Total output Unit labour cost
Country A £4.8m 600 units \( \frac{4{,}800{,}000}{600} = £8{,}000 \)
Country B £7.0m 1,000 units \( \frac{7{,}000{,}000}{1{,}000} = £7{,}000 \)

Country B spends more on labour in total, yet its unit labour cost is lower, because its output is higher still. On this measure B is the more cost-competitive of the two: A's unit labour costs are 14% higher. A total wage bill on its own says nothing about competitiveness - only cost per unit does.

Factors Influencing Competitiveness

Competitiveness is relative, so it depends on how one country performs compared with its rivals.

Cost Factors

  • Unit labour costs: Rising unit labour costs relative to competitors can reduce competitiveness.
  • Exchange rates: A weaker currency can improve price competitiveness by making exports cheaper and imports more expensive.
  • Inflation: Higher domestic inflation compared with trading partners can reduce competitiveness.
  • Productivity: Higher productivity can reduce costs and improve competitiveness.

Non-Cost Factors

  • Innovation and technology: New products, processes, and technologies can enhance competitiveness.
  • Quality and branding: Strong brands and high quality can allow firms to charge premium prices.
  • Infrastructure and logistics: Efficient transport, energy, and digital infrastructure can support competitiveness.

Significance of Competitiveness

Benefits of High Competitiveness

  • Exports: Higher competitiveness can boost exports, improving the current account balance.
  • Economic growth: Increased exports can stimulate growth and create jobs.
  • Employment: Export-oriented industries may expand, creating more employment opportunities.
  • Current account: A stronger export sector can help reduce current account deficits.

Problems of Low Competitiveness

  • Exports: Lower competitiveness can reduce exports, worsening the current account balance.
  • Economic growth: Reduced exports can slow growth and lead to lower investment.
  • Employment: Export-oriented industries may contract, leading to job losses.
  • Current account: A weaker export sector can contribute to persistent current account deficits.

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Seven original multiple-choice questions on how competitiveness is measured, the cost and non-cost factors behind it, and why it matters.

Practice Questions: 4.1.9 International Competitiveness

Past paper questions on this topic

Four questions on International Competitiveness from the Edexcel A-Level papers, 2017–2023, 8 to 25 marks. Each one links straight to the page of the official mark scheme where its answer begins.

Past Paper Questions: 4.1.9 International Competitiveness