International 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.
Stuck on this topic? Work through it with an online A-Level Economics tutor in a free 15-minute intro call, or send an essay on it for A-Level Economics essay marking.