International Competitiveness: Measures and Determinants
International competitiveness is the ability of a country's firms to compete successfully in domestic and foreign markets, and it has both a price and a non-price dimension.
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Method
- Distinguish price competitiveness (competing on the cost of a good relative to rivals) from non-price competitiveness (competing on quality, design, reliability, branding or innovation).
- Explain unit labour cost (ULC) as a price competitiveness measure: ULC = total labour cost / output (or wage cost per unit produced), which rises whenever wages grow faster than productivity.
- Explain the effect of the exchange rate on price competitiveness: an appreciation raises the foreign-currency price of a country's exports even if its domestic costs of production are unchanged, worsening price competitiveness.
- Explain the non-price determinants of competitiveness: product quality, design, reliability and reputation, all of which can let a firm charge a premium price without losing customers to cheaper rivals.
- Explain the underlying long-run determinants of competitiveness: sustained productivity growth (driven by investment in education, capital and infrastructure), spending on research and development and innovation, and macroeconomic stability that supports business investment.
- Evaluate by noting that competitiveness is relative to other countries, so a country's competitiveness can worsen even if its own performance is unchanged, if its rivals improve faster; that price competitiveness matters most for price-sensitive, commodity-type goods, while non-price competitiveness matters most for differentiated, branded goods; and that short-run exchange rate movements can distort measured competitiveness without reflecting any real underlying change in costs or productivity.
Worked example
In Year 1, the average wage in a country's manufacturing sector is 30,000 pounds and average output per worker (productivity) is 60 units, so unit labour cost is wage divided by output. In Year 2, the average wage rises by 10% to 33,000 pounds, while productivity rises by only 5% to 63 units. Calculate the unit labour cost in each year and the percentage change, then explain what this means for the country's price competitiveness.
- Calculate Year 1 unit labour cost: 30,000 / 60 = 500 pounds per unit.
- Calculate Year 2 unit labour cost: 33,000 / 63 = 523.81 pounds per unit (to two decimal places).
- Calculate the percentage change: (523.81 - 500) / 500 x 100 = 4.76%.
- State the answer: unit labour costs rose by approximately 4.8%.
- Explain the competitiveness effect: because wages grew faster (10%) than productivity (5%), the cost of producing each unit of output rose, so, other things being equal, this country's price competitiveness has worsened relative to a rival economy whose unit labour costs did not rise by as much.
Practice questions
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Q1Define unit labour cost (ULC).Show answer
Answer: The labour cost of producing one unit of output, calculated as total labour cost divided by output (or wage cost divided by productivity).
Q2Give one example of a non-price factor that affects international competitiveness.Show answer
Answer: For example, product quality, design, reliability, delivery times, or brand reputation.
Q3A country's wages rise by 3% and its productivity rises by 5%. Explain what happens to its unit labour costs.Show answer
Answer: Unit labour costs fall, because productivity is rising faster than wages, meaning the labour cost of producing each unit of output decreases.
Q4Explain in one sentence why an appreciation of the exchange rate can worsen a country's price competitiveness.Show answer
Answer: An appreciation raises the foreign-currency price of exports even though the domestic cost of producing them has not changed.
Q5Name one long-run determinant of international competitiveness other than wages.Show answer
Answer: For example, investment in education and skills, infrastructure, or spending on research and development and innovation.
Q6Explain in one sentence why competitiveness is described as 'relative'.Show answer
Answer: A country's competitiveness depends on its performance compared with other countries, so it can worsen even without any change at home if rivals improve faster.
Exam-style questions
Written in the style of a A Level Economics exam paper, with a full mark scheme.
In Year 1, Country P's average wage is 25,000 pounds and average output per worker is 50 units. In Year 2, its average wage rises to 26,250 pounds (a 5% rise) and average output per worker rises to 51.5 units (a 3% rise). Calculate the unit labour cost in each year and the percentage change, and state what this suggests about Country P's price competitiveness.
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Evaluate the factors that determine a country's international competitiveness.
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