4.1.9 - International competitiveness
International competitiveness is about how well a country's firms can sell goods and services against foreign rivals. It matters because it shapes exports, the current account, employment, inward investment, and living standards. A country can be competitive because it is cheaper, but also because its products are higher quality, better designed, more reliable, or backed by stronger marketing and after-sales service.
Measuring Competitiveness
A country is internationally competitive when overseas buyers see its output as better value than close substitutes from other countries. If competitiveness improves, exports are more likely to rise and persistent current account deficits become less likely. If it weakens, domestic firms find it harder to hold market share at home and abroad.
Definition: International competitiveness
A country's ability to sell its goods and services in international markets relative to those of other countries.
Two common measures are relative unit labour costs and relative export prices.
Definition: Unit labour costs
The labour cost of producing one unit of output.
Relative unit labour costs compare a country's unit labour costs with those of its trading partners, usually using an index. If UK wages rise by 5% while labour productivity rises by 2%, unit labour costs rise by about 3%. If competitors' unit labour costs rise more slowly, the UK's relative unit labour costs increase, so the UK becomes less price competitive. This measure is useful because labour is a major cost for many firms and it combines wages with productivity rather than looking at wages alone.
Relative export prices compare the final prices of a country's exports with the export prices of its main competitors. This is closer to what overseas buyers actually see. A country's relative export prices can rise because costs have risen, because its currency has appreciated, or because firms have chosen not to absorb higher costs through lower profit margins.
Neither measure is complete on its own:
| Measure | Main strength | Main limitation |
|---|---|---|
| Relative unit labour costs | Good guide to underlying cost competitiveness because it combines wages with productivity | Misses non-labour costs, exchange-rate and profit-margin effects on final selling prices, and non-price competitiveness |
| Relative export prices | Closer to the actual price seen by foreign buyers and captures exchange-rate effects more directly | Misses quality, branding, reliability, delivery times, and after-sales service |
Exam tip
If a question asks which measure is more useful, judge it by the purpose. Relative export prices are often better for what overseas customers face right now. Relative unit labour costs are often better for diagnosing whether wages and productivity are making firms more or less cost competitive. The strongest answer adds that neither measure captures non-price competitiveness fully.
Costs, Prices and Productivity
Competitiveness changes when a country's costs, prices, or exchange rate move relative to rival economies. An appreciation makes exports dearer in foreign-currency terms, so price competitiveness tends to fall. A depreciation usually does the opposite. However, the effect is not automatic. If demand is price inelastic, or firms choose to keep foreign prices unchanged and accept different profit margins, the change in sales may be limited.
Productivity is one of the most important underlying drivers. Higher productivity means more output is produced per worker or per hour, so unit labour costs fall. That gives firms more room to lower prices, protect margins, or pay relatively high wages without losing competitiveness. Low inflation relative to trading partners also helps because domestic prices rise more slowly over time, so exports do not become expensive as quickly.
Common mistake
High wages do not automatically mean low international competitiveness. If productivity is also high, unit labour costs can still stay low enough for firms to compete effectively.
Investment strengthens competitiveness through several routes. Investment in machinery and technology can raise efficiency and lower production costs. Infrastructure investment can reduce transport delays, energy problems, and communication costs. Research and development can improve product quality, create new goods, and build non-price competitiveness as well as cost competitiveness. By contrast, persistent underinvestment leaves firms using older capital and weaker methods than foreign rivals.
Continue this lesson.
You’re previewing NovaLearn without an account. Create a free account to read the rest.
Create free account