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Study notes

Competitiveness

  • Levels: A Level
  • Exam boards: AQA, Edexcel, OCR, IB

What is competitiveness?

Competitiveness is the ability of an economy to compete fairly and successfully in markets for internationally traded goods and services that allows for rising standards of living over time.


Revision Video: International Competitiveness

International Competitiveness revision video
  1. Cost competitiveness – differences in relative unit costs between producers
  2. Non-price competitiveness – this encompasses technical factors such as product quality, design, reliability and performance, choice, after-sales services, marketing, branding and the availability and cost of replacement parts

Key: In highly competitive markets where prices have often converged, non-price factors are crucial

Unit labour costs (ULCs)

  • These are the labour costs of supplying goods and services per unit of output – in simple terms, how expensive it is to make something
  • Unit labour costs are determined by
  • The costs of employing people (wage rates, salaries, employment taxes)
  • The productivity of those people employed
  • Data on unit labour costs is normally expressed in relative terms i.e. we compare unit labour costs in one country relative to another
  • Unit labour costs will rise when wages rise faster than the annual improvement in productivity
Factors in the Global Competitiveness Index

Non-wage costs

These are also important when it comes to sustaining an improvement in competitiveness in global markets. The main non-wage costs for businesses are:

  • The costs of meeting environmental regulations, health and safety laws
  • Environmental taxes such as the carbon tax or the need to purchase carbon emissions permits
  • Employment protection laws and health and safety laws
  • Requirements to provide business pensions

World Economic Forum – Global Competitiveness Report

This is a report published annually and is an attempt to rank countries using a group of twelve indicators.

  • Institutions (property rights protection, trust, judicial independence, corruption)
  • Infrastructure (transport, telephony, and energy, ports)
  • Macroeconomic environment (including stability of key macro indicators)
  • Health and primary education (including many of the indicators used in the HDI calculation)
  • Higher education and training including the quality of degree courses and business training schemes
  • Goods market efficiency – efficiency in getting products to market at a competitive price
  • Labour market efficiency – including improvements in labour productivity
  • Financial markets (including stability of markets, strength of banks)
  • Technological readiness (readiness to exploit, adapt to new technologies)
  • Market size (linked to population size and per capita incomes)
  • Business sophistication (quality of supply chains, industrial clusters, quality of management)
  • Innovation

Competitiveness in Global Markets - Knowledge as a Public Good

  • For many countries wishing to sustain improved competitiveness or perhaps make progress towards being a high-income developed country, investment in high-knowledge industries is regarded as crucial – but there are grounds for thinking that building these businesses is not an easy process.
  • Many businesses might prefer to let others discover successful and commercially viable new technologies and then copy them if the patent laws are not sufficiently strong.
  • This may hamper levels of research and development spending leading to weaker innovation in highly competitive markets.
  • One option is to strength patent laws to protect intellectual property.
  • Another strategy is to increase public (state) funding of scientific research. If we look back in history many well-known products had their origins in state sector funding - for example GPS, smoke detectors, water filters and cordless power drills!
Economic importance of health and education spending

Causes of long term improvements in competitiveness

  1. Domestic and foreign investment creating extra manufacturing capacity – leads to a supply surplus output to export
  2. Gains in relative labour productivity / efficiency helping to keep relative unit labour costs low against that of competing nations
  3. Effective macroeconomic policies to keep inflation low
  4. Improvements in human capital geared to manufacturing industries and increasingly to services e.g. health tourism
  5. Exploitation of internal and external economies of scale
  6. Advantages from having a competitive exchange rate over a number of years – keeps overseas exports prices relatively low
  7. Successful adaptation and exploitation of new technologies
  8. Competitive gains from supply-side structural reforms
  9. Successful integration into trade agreements / single markets building customer bases and using joint ventures
  10. Countries successfully moving beyond early dependence on a small range of industries

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