International competitiveness depends on relative prices, costs and non-price strengths.
Must know
- Relative unit labour costs link wages to productivity.
- Exchange rates affect price comparisons.
- Quality reliability and innovation affect non-price competition.
Must know definitions
International competitiveness: the ability of a country to compete successfully in overseas markets and sustain improvements in real output and living standards.
Unit labour cost: the labour cost of producing one unit of output; falls when productivity rises faster than wages.
Relative export prices: an index comparing a country's export prices with those of its trading partners.
Non-price competitiveness: the ability to compete through quality, design, reliability, and innovation rather than price alone.
Explain and apply
Mechanism in brief: Higher output per worker can lower labour cost per unit even if wages rise. Firms may then reduce prices or invest in quality, improving their position relative to foreign rivals.
Distinguish: Low wages alone do not prove competitiveness; a current-account balance has causes beyond competitiveness.
Use the extract: Compare wages with productivity and competitors' costs; look for quality, delivery or service differences.
Measures of international competitiveness
International competitiveness is the ability of a country to sell its goods and services successfully in overseas markets and sustain improvements in real output and living standards. It is measured in three main ways:
- Relative productivity rates — how much output a worker produces compared with workers in other countries; higher relative productivity lowers unit costs and raises competitiveness.
- Relative unit labour costs — the labour cost per unit of output compared with other countries; the lower a country's relative unit labour cost, the more price-competitive its exports.
- Relative export prices — the price of a country's exports expressed as an index relative to its competitors; a falling index signals rising competitiveness.
A country can compete on price (lower unit labour costs, cheaper export prices) or on non-price factors (quality, reliability, design, innovation) — a high-wage economy such as Germany remains competitive in cars despite high unit labour costs, because non-price factors sustain demand.
Factors influencing international competitiveness
Many of these factors were already met in earlier units — here they are drawn together specifically as determinants of competitiveness:
| Factor | Effect on competitiveness |
|---|---|
| Productivity (Unit 2) | productivity ↑ → unit labour costs ↓ → export prices can fall without cutting profit margins → competitiveness ↑ |
| Quality of human capital (Unit 2) | skilled, well-trained workforce → higher productivity and higher-quality output → competitiveness ↑ |
| Exchange rate (Unit 4) | depreciation/devaluation → exports cheaper in foreign currency → price competitiveness ↑ (though import costs also rise) |
| Wage and non-wage costs (Unit 3) | wages rising faster than productivity → unit labour costs ↑ → competitiveness ↓ |
| Regulations (Units 1 and 3) | excessive regulation ("red tape") → compliance costs ↑ → average costs ↑ → competitiveness ↓ |
| Quality of infrastructure (Unit 2) | poor transport, energy or digital infrastructure → higher costs of doing business → competitiveness ↓ |
| Non-price factors (Unit 3) | quality, reliability, design, innovation, after-sales service → can sustain competitiveness even at higher prices |
The ability to attract foreign direct investment (FDI) and skilled labour also matters: countries offering political and economic stability, competitive tax rates, and a flexible labour market tend to attract more inward investment, which raises productive capacity and long-run competitiveness.
Measures to increase international competitiveness
Governments mainly rely on supply-side policies, alongside targeted trade and exchange rate measures:
- Education and training policies — raise the quality of human capital → productivity ↑ → unit labour costs ↓.
- Investment incentives — e.g. capital allowances or grants encourage firms to invest in new technology → productivity and non-price competitiveness ↑.
- Privatisation and deregulation — expose firms to competitive pressure and reduce red tape → average costs ↓.
- Measures to reduce the exchange rate — e.g. cutting interest rates may encourage depreciation under a floating exchange rate. The government cannot simply announce a lower fixed parity when the rate floats. Direct currency intervention can also influence the market rate, but this departs from a purely free float and does not guarantee a particular rate.
- Trade liberalisation — removing tariffs and quotas exposes domestic firms to competition, forcing efficiency gains, and gives exporters better access to foreign markets.
The significance of international competitiveness
A country that is internationally competitive tends to enjoy export-led growth: competitiveness ↑ → export volumes ↑ → AD ↑ → economic growth ↑ and employment ↑, with a positive effect on the current account of the balance of payments. An internationally uncompetitive country faces the reverse: falling export demand, a deteriorating current account, and pressure on domestic employment as production shifts to more competitive rivals. Because of this, governments often prioritise supply-side policy to defend or improve competitiveness over the long run, rather than relying on short-term exchange rate adjustments alone.
A temporary exchange-rate advantage can be eroded by higher import costs or inflation. Sustained gains are more plausible when productivity and quality improve relative to competitors, rather than wages simply falling.
Rapid recap
Competitiveness is relative to trading partners. Unit labour cost combines pay and productivity; non-price factors include quality, reliability, service and innovation.
Diagram cue: trace productivity/cost or quality changes → relative competitiveness.
Related chapters: Unit 3 chapter 5 · Unit 4 chapter 7 (p. 35)