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: Lower relative unit labour costs suggest stronger price competitiveness.

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

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

Global market share: A rising share of world exports suggests strong international competitiveness.

Factors Influencing Competitiveness

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

Cost Factors

• Relative productivity: Higher labour productivity reduces unit costs and improves competitiveness.
• Relative inflation: Higher inflation than rival countries makes domestic goods less price competitive.
• Relative labour costs: Wages and non-wage labour costs affect firms' overall production costs.
• Exchange rate: A weaker currency lowers the foreign price of exports and can improve price competitiveness.

Non-Cost Factors

• Product quality, design, and innovation
• Reliability and after-sales service
• Branding and marketing strength
• Infrastructure, such as transport and digital networks, that supports efficient trade

Significance of Competitiveness

Benefits of High Competitiveness

• Export-led growth: Strong exports increase aggregate demand and GDP.
• Improved current account: Higher export earnings can move the balance towards surplus.
• Increased FDI: Competitive economies are more attractive to foreign investors.
• Higher employment and living standards: Economic growth can support job creation and rising incomes.

Problems of Low Competitiveness

• Current account deficits and possible increases in foreign debt
• Loss of industries and jobs through deindustrialisation
• Lower economic growth and a greater risk of recession
• Policy pressure as governments face hard trade-offs when trying to restore competitiveness

Evaluation and Application

Competitiveness should always be analysed in comparative terms, such as UK productivity growth relative to Germany or France.

It is also important to consider both price competitiveness and non-price competitiveness. For developed economies such as the UK, quality, innovation, and branding may matter as much as low costs.

Improving competitiveness is a common aim of supply-side policies, such as investment in education, infrastructure, and research and development. However, these policies often have high opportunity costs and long time lags.

There may also be a trade-off between competitiveness and other macroeconomic objectives. For example, a weaker currency may improve competitiveness but also create imported inflation, while competitiveness based on low wages may reduce living standards.

Exam Preparation