Measures of Competitiveness
The most commonly used ways of measuring international competitiveness are:
Relative unit labour costs – Unit labour costs are calculated by dividing total wages by output in a given time period. For instance if a steel works produces 10,000 tons of steel per week and its weekly wage bill comes to £100,000, its unit labour costs are £10 (per ton).
Relative unit labour costs measure how a country’s unit labour costs are changing over time and can be used to compare how a country’s unit labour costs are changing compared to those of other countries. This is done using index numbers. A base year has to be chosen when the index is equal to 100. Suppose 5 years later a country A’s index of unit labour costs has risen to 130, but country B’s index has risen to 150. Country A’s relative unit labour costs will have fallen, although its absolute unit labour costs will have risen (but not as fast as those of country B).
A fall in relative unit labour costs indicates that a country is becoming more competitive.
Relative export prices – Relative export prices are the prices of a country’s exports compared to the export prices of other countries. Again, this can be measured using index numbers to look at how a country’s export prices are changing over time compared to those of other countries.
Factors Affecting International Competitiveness
Productivity – Output per worker is one of the determinants of unit labour costs. Improvements in productivity is one of the determinants of unit labour costs (see above). The higher the output per worker (in a given period of time), the lower the unit labour costs (ceterus paribus). The U.K. economy has a productivity problem compared to its main competitors, such as France, Germany and the U.SA. Productivity is about 20% lower in the U.K. than these countries.
Wage costs – The level of wages is also important in determining unit labour costs. The higher the wage rate, the higher the unit labour costs (ceterus paribus) and the less competitive is the economy. Wage rates in the U.K. are lower than in some of our competitor countries, which compensates to some extent for lower productivity.
_Non-wage costs of employment _– As well as paying wages, employers may have to pay other costs when they employ workers, for instance pension contributions, sick pay, maternity pay and in some countries health care insurance for their workers. These non-wage costs are much higher in some countries than others, and can therefore affect international competitiveness.
Exchange rates – A rise in the exchange rate (ceterus paribus) will push up the prices of a country’s exports and push down the prices of its imports, thus making the economy less competitive. But it should be remembered that it is a change in the real exchange rate, rather than the nominal exchange rate that will impact on price competitiveness (see notes on 4.1.8).
The impact of changes in exchange rates can also be reduced if exporters and importers adjust their profit margins rather than prices, when the exchange rate changes (see notes on 4.1.8).
Quality of goods – Quality as well as price is critical to competitiveness. There are several aspects of quality: good design; reliability; after-sales service and so on. High wage countries generally have to compete on quality rather than price. German cars for instance, such as BMW and Mercedes are still very competitive even though they are premium priced brands. To remain internationally competitive on quality requires a country to invest substantially in research and development. This enables producers to develop new technologies, innovative products and more efficient methods of production.
Business regulation – The extent and nature of regulation can affect an economy’s competitiveness, depending on whether it increases or decreases costs or improves/worsens efficiency. A highly regulated labour market that makes it difficult for firms to hire immigrant workers, for instance could reduce competitiveness, but regulating monopolies may increase efficiency.
_Taxation _– High business taxes, such as high rates of taxes on profits may discourage investment and R&D.
Significance of an International Competitiveness for the Economy
A competitive economy is likely to enjoy a high growth rate, a healthy balance of payments, rising wages and living standards, full employment and will probably attract a lot of foreign direct investment.
A noncompetitive economy is likely to have the opposite characteristics which may lead to social tensions and political instability.
Governments can do a lot to improve competitiveness, through a mixture of supply-side policies, exchange rate policy and macro-economic policies.
- Explain why it is possible for a high wage economy, such as Germany to be able to compete successfully with China in industries such as motor car manufacturing.
- Your answer should include: productivity / quality / research and development / investment / supply-side policies / macro-economic policies