Transcript International Competitiveness

International competitiveness:
The Real Exchange Rate
• Nominal exch. rate x ratio of UK prices to foreign prices
• Real exch. rate  if:
a) nominal exch rate rises
b) UK prices rise relative to foreign prices
• So  real exch. rate =  int’l competitiveness
International Competitiveness:
Labour productivity
• Labour productivity – high productivity → ↓ ave. costs →
↓ relative export prices
• Any increases in labour productivity must not be offset by
higher relative unit labour costs or the competitive
advantage will be lost
Determinants of
Relative Unit Labour Costs
• Macroeconomic stability – encourages capital
investment
• Level of human capital – skills & education
• Capital investment – UK has tended to under-invest
in long-run infrastructure
• Labour market flexibility – lack of competition in
labour markets raise wage rates (workers bargain
harder) – UK unemployment is very low
Other contributors to
Competitiveness
• Quality
• Innovation
• Niche / specialty / unique area of expertise
• Macroeconomic stability
• Levels of corruption – how reliable / transparent is it when
doing business with the UK?
Gov’t Policy to Improve Competitiveness
• Low inflation target for MPC – create stability & low
cost pressures for industry – promote investment
• Encourage flexible labour market – reduce work lost
through industrial action
• Reduce red tape & corp. tax (recent ↑ NI
contributions have ↑ business costs)
• Promote “knowledge driven” economy – education,
lifelong learning, ICT training etc.
• Tax incentives for R&D
• Encourage firms to focus on quality, not just prices