Competitiveness
The ability of an economy to compete fairly and successfully in markets for internationally traded goods, allowing for rising living standards over time.
Measures of competitiveness:
Price competitiveness -
Relative unit labour costs:
Labour costs of supplying goods per unit output expressed in relative terms. This is then compared to that of other countries, and expressed as an index number.
This measures productivity.
This is used as a measure, as:
- Almost all firms use labour
- Labour costs reflect the quality of capital (i.e if a few workers produce a lot of output, this indicates extensive/efficient capital)
- Labour is uniform in all economies, so can be compared
Relative export prices:
The ratio of one country's export prices relative to another country's, expressed as an index. The lower the relative export price, the more competitive the country.
A measure of a country's advantage/disadvantage in selling its products in international markets.
Non-price competitiveness -
This encompasses technical factors such a product quality, design, reliability, marketing and availability.
Factors influencing international competitiveness:
Controlling inflation - greater inflation than other countries means, ceteris paribus, a country's exports will be rising in price and losing price competitiveness.
Supply-side policies:
Productivity - output per worker per hour. If workers increase productivity without changing wage, competitiveness increases.
FDI - by attracting more FDI, a country can increase its productive capacity, which can help produce long term growth and raise living standards. Lowering taxes on inwards FDI can help increase the amount received.
Tax incentives (e.g reducing corporation tax) - affects firms' costs. Decreased costs per unit output.
Level of NMW - lower NMW means lower unit labour costs. Also restricting trade unions and their bargaining power has the same effect. Germany only put a NMW into place in 2014.
Regulation - more regulation can increase costs for firms, making them less productive. Can also disincentivise firms from setting up in the first place.
Mobility of labour (e.g by improving infrastructure) - greater geographical and occupational mobility of labour means workers will be more productive and so greater output per unit labour.
Exchange rate - a depreciation/devaluation of XR makes a country's exports more competitive as other country can buy a greater amount for less. So fixing the XR as China has done can improve competitiveness.
Education - can help improve non-price competitiveness, product quality etc. Germany focus on STEM.
Benefits of being internationally competitive:
- Country's exports (e.g Germany's) become more price inelastic, as they gain a good reputation/consumers become more confident in them. As a result, they are able to demand more for their exports and gain more revenue.
- Firms can reach more consumers (international rather than domestic reach)
- This in turn can help firms gain economies of scale and lower costs even further, becoming more competitive.
- Balance of payments tends towards trade surplus
Problems of being internationally competitive:
- Infant industries may find it much harder to find a foothold in an international market, and these may fail whilst others succeed. Leads to economies becoming too reliant on certain industries.
- If jobs are offshored, the domestic country may face job losses and structural unemployment.
- If tax rates are lowered to increase competitiveness, the government loses tax revenue, which could limit government spending.
- Keeping unit labour costs down through lower wages can be bad for living standards. Bad working conditions due to lack of regulation in SE Asian countries (Philippines, China, etc.) as they try to undercut each others export prices.
Relative unit labour costs:
Labour costs of supplying goods per unit output expressed in relative terms. This is then compared to that of other countries, and expressed as an index number.
This measures productivity.
This is used as a measure, as:
- Almost all firms use labour
- Labour costs reflect the quality of capital (i.e if a few workers produce a lot of output, this indicates extensive/efficient capital)
- Labour is uniform in all economies, so can be compared
Relative export prices:
The ratio of one country's export prices relative to another country's, expressed as an index. The lower the relative export price, the more competitive the country.
A measure of a country's advantage/disadvantage in selling its products in international markets.
Non-price competitiveness -
This encompasses technical factors such a product quality, design, reliability, marketing and availability.
Factors influencing international competitiveness:
Controlling inflation - greater inflation than other countries means, ceteris paribus, a country's exports will be rising in price and losing price competitiveness.
Supply-side policies:
Productivity - output per worker per hour. If workers increase productivity without changing wage, competitiveness increases.
FDI - by attracting more FDI, a country can increase its productive capacity, which can help produce long term growth and raise living standards. Lowering taxes on inwards FDI can help increase the amount received.
Tax incentives (e.g reducing corporation tax) - affects firms' costs. Decreased costs per unit output.
Level of NMW - lower NMW means lower unit labour costs. Also restricting trade unions and their bargaining power has the same effect. Germany only put a NMW into place in 2014.
Regulation - more regulation can increase costs for firms, making them less productive. Can also disincentivise firms from setting up in the first place.
Mobility of labour (e.g by improving infrastructure) - greater geographical and occupational mobility of labour means workers will be more productive and so greater output per unit labour.
Exchange rate - a depreciation/devaluation of XR makes a country's exports more competitive as other country can buy a greater amount for less. So fixing the XR as China has done can improve competitiveness.
Education - can help improve non-price competitiveness, product quality etc. Germany focus on STEM.
Benefits of being internationally competitive:
- Country's exports (e.g Germany's) become more price inelastic, as they gain a good reputation/consumers become more confident in them. As a result, they are able to demand more for their exports and gain more revenue.
- Firms can reach more consumers (international rather than domestic reach)
- This in turn can help firms gain economies of scale and lower costs even further, becoming more competitive.
- Balance of payments tends towards trade surplus
Problems of being internationally competitive:
- Infant industries may find it much harder to find a foothold in an international market, and these may fail whilst others succeed. Leads to economies becoming too reliant on certain industries.
- If jobs are offshored, the domestic country may face job losses and structural unemployment.
- If tax rates are lowered to increase competitiveness, the government loses tax revenue, which could limit government spending.
- Keeping unit labour costs down through lower wages can be bad for living standards. Bad working conditions due to lack of regulation in SE Asian countries (Philippines, China, etc.) as they try to undercut each others export prices.
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