Transcript Extract 2x - Beaconsfield High School Virtual Learning

Extract 2: Net Trade and Competitiveness
Extract 2: Specification Topics
Page 6
• Students should be able to
1. Distinguish between absolute and comparative advantage
2. Analyse the effects of international trade
3. Outline the pattern of global trade
4. Analyse the causes of imbalances on the UK balance of
payments on current account
5. Define, measure and analyse the significance of the terms of
trade, and changes in the terms of trade over time
6. Evaluate comparative advantage as explanation of trade
patterns
7. Evaluate different economic policies to correct imbalances on
the balance of payments (current account)
Drawing out the key issues in Extract 2
• Why is competitiveness important for economic growth?
• What are the consequences of a structural trade deficit on a
country’s economic performance?
• To what extent has Coalition economic policy brought about
an improvement in UK external trade?
• What determines the terms of trade and how does this affect
competitiveness?
• What are the main drivers of global competitiveness?
• Which policies are most important in the long run in
sustaining competitiveness in the global economy?
• How can education & training reforms and investment affect
competitiveness and economic growth?
• Is a flexible labour market important for trade?
Extract 2: UK Net Trade and Competitiveness
• A loss of comparative
advantage is an important
concern for future economic
growth in the UK.
• Net trade continues to be a
drag on such growth.
• As the UK economy enters the
recovery stage of the cycle, net
trade continues to be negative
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• Comparative advantage exists
when a country has a ‘margin
of superiority’ in supplying a
product i.e. where marginal
cost is lower
• Net trade measures a
country’s balance of trade i.e.
value of export – value of
imports
• If a country is running a trade
deficit, there is a net outflow
of demand from the circular
flow of income – hence a
“drag on growth”
Figure 2.1: UK Net Trade 2009-2013
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The net balance of trade in goods and services is shown in Figure 2.1
Trade balance
in 2009 was
-£28bn
Trade balance
in 2010 was
-£37bn
Trade balance
in 2012 was
-£35bn
Trade balance
in 2011 was
-£24bn
The UK trade
deficit in 2011 Q1
was the smallest
since 1998
Trade balance
in 2013 was
-£34bn
Extract 2: UK Net Trade and Competitiveness
• The UK government stated in its
2011 Plan for Growth that it
would aim to ‘rebalance’ the
economy by encouraging growth
in UK exports and FDI.
• This was one of four priorities
for achieving growth. The others
were:
1. Reforms to the tax system
2. Measures intended to make the
UK a more attractive place to
start a business
3. Measures intended to create a
more educated and a more
flexible workforce.
Page 6
• Read the 2013 Plan for
Growth implementation
update
• The Plan for Growth was
centered around supply-side
reforms and policy
interventions designed to
improve business
competitiveness and labour
market flexibility. You can find
a summary of the key
measures on the next slide
Extract 2: Plan for Growth – Policy Interventions
Page 6
• Business taxation:
– Corporation tax cut to a new level of 20% from 2015
– Patent box (lower taxes on patented products) to stimulate innovation
– New tax reliefs for animation, high-end television and games industries
– Reductions in national insurance contributions for businesses employing
long-term unemployed / youth unemployed
• Business finance and red tape:
– Creation of Green Investment Bank for renewable energy investment
– Funding for Lending Scheme in association with the Bank of England
– 24 new Enterprise Zones established in areas of high unemployment
– Qualifying period for unfair dismissal increased from one year to two
• Education reforms:
– Expansion of free schools and academies
– Large rise in the number of apprenticeships available under Youth Contract
– 14 science and innovation capital projects
Extract 2: UK Net Trade and Competitiveness
• As a result of the globalisation
of the world economy, the
long-run economic
performance of an individual
economy is increasingly
determined by its international
competitiveness.
• There is no single measure of
an economy’s competitiveness.
• Many measures, such as the
terms of trade and relative unit
labour costs, focus on price and
cost competitiveness.
Globalisation
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Deepening of relationships
between countries of the
world reflected in an
increasing level of overseas
trade and investment.
The ability of a business or a
International
country to compete
competitiveness effectively in international
markets.
Terms of trade
The terms of trade (also
known as the real exchange
rate) is the real value of
countries exports in terms of
their imports.
Relative unit
labour costs
(RULCs)
Wage costs per unit of output
– determined by wage and
productivity levels – relative
to those in other countries.
Selected Competitiveness Rankings for 2014
1:
Switzerland
4: Germany
2: Singapore
5: United
States
3: Finland
9: UK
Competitiveness Indicators
1. Institutions and
Infrastructure
2. Macroeconomic stability
3. Health/education systems
4. Financial markets (including
strength/stability of banks)
5. Technological readiness
6. Market size (linked to
population size and per
capita incomes)
7. Business sophistication
(quality of supply chains,
industrial clusters) and rate
of innovation
Global Competitiveness Index (WEF Measure)
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Global Competitiveness Index uses indicators which measure:
Indicator
Brief comment on the indicator
Effectiveness of institutions
Protection of property rights, rule of law, corruption
Quality of infrastructure
Quality of transport, communications, energy etc.
Macroeconomic performance
Inflation, fiscal balance, government debt, growth
Health and primary education
Malaria incidence, prevalence of HIV, mortality rates
Higher education and training
Quality of teaching and attainment e.g. in Maths
Efficiency of goods & labour markets
Intensity of competition, tariffs, other barriers
Technological readiness
Internet use, availability of latest technologies
Sophistication of business
Supplier quality, business clusters,
Innovation
Patent applications, research & development spend
2014-15 Global Competitiveness Index (UK Rankings)
Indicator
UK ranking out of
144 countries
Overall
competitiveness
9/144
Institutions
12/144
Infrastructure
10/144
Macroeconomic
environment
107/144
Labour market
efficiency
5/144
Technological
readiness
2/144
Highlighted problems for = business
• Access to financing
• Inadequately educated workforce
Industries of UK Global Advantage: Aerospace
United Kingdom aerospace industry is 2nd largest globally, employs around
113,000 people directly and around 276,000 indirectly and has an annual
turnover of around £20 billion
Context: Inward Foreign Direct Investment into the UK
UK is home to transnational businesses who want a base here (as part of a global footprint)
Nissan, Sunderland
AkzoNobel, Ashington
Cummins Power Generation, Ramsgate
Siemens, Hull
Analysis: International (External) Competitiveness
External competitiveness is the ability to sell goods and services at
competitive prices in a foreign country
• Cost competitiveness
• Differences in unit costs – reflected in producer prices
• Non-price competitiveness
• Product quality, design, reliability and performance, choice,
after-sales services, marketing, branding and the availability
and cost of replacement parts
• Non-wage costs:
• Costs of meeting environmental / health regulations
• Environmental taxes e.g. carbon taxes and waste taxes
• Employment protection laws and health and safety laws
• Requirements to provide pensions for employees
Relative Unit Labour Costs
• Relative unit labour costs measure the labour cost per unit of output
expressed in a common currency and index number format
• Relative unit labour costs will rise when
1. A country’s exchange rate appreciates against other nations
2. Wage costs rise relatively faster
3. Labour productivity growth is slower than in other countries
Country
Index of
Relative Unit
Labour Costs in
2010
Index of
Relative Unit
Labour Costs in
2014
Source: OECD World Economic Outlook
United Kingdom
100
103.4
No significant change in cost competitiveness
Switzerland
100
111.0
Appreciating currency
Japan
100
76.2
Depreciating currency and price deflation
Germany
100
102.6
Spain
100
88.6
Recession, wage cuts and some deflation
New Zealand
100
119.1
Strong currency has worsened competitiveness
Comment
The Terms of Trade
• Terms of trade measures the relative prices of products that we export
compared to the cost (prices) of imports goods
• The terms of trade are measured by ((Index of export prices / Index of
import prices) x 100)
– If the terms of trade index goes up, we say that the terms of trade have improved
– If the index falls, we say that the terms of trade have deteriorated
• The terms of trade affect the gains from overseas trade
• It also impacts on variables such as the balance of payments and living
standards
• The terms of trade is heavily influenced by changes in the exchange rate
• A rise in the value of a country domestic currency decreases prices for its
imports but also makes exports less competitive
• Thus a higher currency improves the terms of trade but might worsen the
balance of trade on the current account
Significance of Changes in the Terms of Trade
Standard of Living
Prices of Imported Technology
Balance of Payments
Changes in the prices of the items
we have to import
Affects relative prices of capital
inputs needed to sustain growth
Export and import prices affect the
value of trade flows
Improved terms of trade
might mean we are able
to import cheaper food
A weak exchange rate
increases the prices of
imports – worsens the
terms of trade – e.g.
makes imports of new
technology more
expensive
Important not to confuse
the terms of trade with
the balance of trade!
What are the key Drivers of Competitive Advantage?
Unit labour costs
Exchange rate
Innovation
Economies of scale
Sustainability
Human capital
Corporation Tax Rates – A Cross Country Comparison
Country
Main rate of corporation tax (per cent)
Australia
30%
Chile
20%
China
25%
France
33%
Greece
26%
India
34%
Italy
31%
Japan
33%
Mexico
30%
Poland
19%
Singapore
17%
South Korea
24%
Spain
30%
Turkey
20%
United Kingdom
21% (20% from April 2015)
United States
40%
Human Capital is important for Competitiveness
Technology spillovers
Precision
Engineering
Universities
Science Parks
Capital Projects
The Rise of Creative
Industries
Extract 2: Focus on UK Competitiveness Policies
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Policy
Detail
Click on the links to explore
further on each policy area
Investment in
infrastructure
•
Public sector investment in infrastructure
worth over £100bn by 2020
Government guarantees for lenders financing
infrastructure projects
•
Background on the
Government’s National
Infrastructure Plan (2014
version)
•
Increasing access to
finance for business
•
•
Funding for Lending Scheme
Creation of a £1bn Business Bank to help
smaller businesses access finance and support
•
•
Funding for Lending
Business Bank
Encouraging
businesses to invest
•
Increase in the tax allowance on investment
from £25 000 to £250 000
Reduction in corporation tax from 23% to 20%
by 2015
•
Corporation tax rate cut
in the UK (2013)
•
Simplifying business
regulation
•
For every new regulation, the government has
committed to remove two regulations
•
Red Tape Challenge
(Government website)
Creating an
educated
workforce
•
Changes to the curriculum to improve literacy
and numeracy
Improving training and apprenticeships
•
Background on the
Government’s Youth
Contract
•
Economic Importance of Infrastructure Investment
Spending on new sewers, roads, wind farms, telecommunications
networks and ports by both the private and the public sector
Examples of UK infrastructure projects
• 2nd Forth Road Bridge
• Cross Rail and the High Speed Rail project
• London Gateway Port & new London super sewer
• Nuclear power plants including Hinkley Point
Economic significance of infrastructure
• Potentially high multiplier effects from multibillion investment projects – boosts AD and jobs
• Lack of infrastructure may discourage FDI
• Increases the capital stock / productive potential
Understanding: Banks and Business Lending
• Commercial banks have lowered their
willingness to take risks when lending
• Rise in non-performing loans (bad
debts) which have contributed to
heavy losses - Total loan write-offs
were over £11bn in 2012
• Higher deposits and tougher checks
to get a housing mortgage
• New (tougher) global rules (known as
Basel III) on the amount of capital and
liquidity that banks must hold
• Many businesses in the UK have
become “credit constrained”
Some Recent Changes to UK Monetary Policy
There have been a number of important changes in the handling of
monetary policy by the Bank of England in recent years
• Quantitative Easing (QE) 2009 – buying bonds to increase
deposits and lending by the banking industry – worth £375bn
• Project Merlin (2011) – an agreement between the commercial
banks & Government to increase bank lending to small/mediumsized businesses
• Funding for Lending Scheme (2012) – a joint policy between
Treasury and the BoE which provides cheaper funding to banks
that increase their loans to households and businesses
• Forward Guidance (2013-14) - under forward guidance, the
Bank’s policy rate will remain at 0.5% until there are clear signs
that the amount of spare capacity in the economy has reached
“normal levels”
Policies to Improve International Competitiveness
Improving functioning of Labour Markets
• Investment in all levels of education , management
• Encouraging inward migration of skilled workers
Infrastructure Investment
• Better motorways, ports, hi-speed rail
• Communications e.g. super-fast broadband, 4G
Supporting Enterprise / Entrepreneurship
• Improved access to business finance e.g. for start-ups
• Incentives for business innovation and invention
Macroeconomic Stability
• Maintaining low inflation / price stability
• A sustainable and competitive banking system
Top Rates of Income Tax – A Cross Country Comparison
Country
Highest personal income tax marginal rate (%)
Australia
45%
Chile
40%
China
40%
France
50%
Germany
47.5%
Greece
46%
India
34%
Italy
48%
Japan
51%
Mexico
30%
Poland
32%
Singapore
20%
South Korea
38%
Spain
52%
Turkey
35%
United Kingdom
45%
United States
35%
Current Account Balance – A Cross Country Comparison
Country
Current account balance (% of GDP)
Australia
-2.9%
Chile
-3.4%
China
+2.0%
France
-1.3%
Germany
+7.5%
Greece
+0.7%
India
-1.7%
Italy
+1.0%
Japan
+0.7%
Mexico
-1.8%
Poland
-1.3%
Singapore
+18.0%
South Korea
+5.8%
Spain
+0.8%
Turkey
-7.9%
United Kingdom
-4.4%
United States
-2.3%
Examples of UK Government Supply-Side Policies
Privatisation of
Royal Mail
Patent Box
Incentive
Shale Gas Tax Cut
Incentives
Fall in
Corporation Tax
Modern
Apprenticeships
– e.g. Youth
Contract
Welfare Caps /
Benefit Reforms
National
Infrastructure
Plan including
HS2 and new
roads
Launch of Green
Investment Bank
and Business
Bank
Selection of Suggested Questions for Extract 2
1.
2.
3.
4.
5.
6.
7.
8.
Describe two causes of a trade deficit
Describe two factors that affect the terms of trade
Distinguish between the balance of trade & the terms of trade
Comment on the importance of higher education and training in
determining a country’s competitiveness
To what extent has the UK achieved an improvement in
competitiveness in recent years?
Evaluate the extent to which reductions in corporation tax may
improve a country’s economic performance
Discuss the impact that demand and supply-side policies can have
in improving the UK’s external trade figures
With the aid of a diagram, analyse how improvements in labour
market flexibility can aid competitiveness and economic growth