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 Factors that determine international
competitiveness
International competitiveness is a measure of the relative cost of
goods/services from a country. Countries which can produce the same
quality of goods at a lower cost are said to be more competitive.

1. Relative Inflation
If the inflation rate is relatively lower than other countries, then over
time you become more competitive because your goods will be
increasing at a slower rate. For example, in the post war period Japan
and Germany had relatively lower inflation rates than major
competitors; this helped them to become more competitive.

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 Factors that determine international
competitiveness
2. Productivity
Productivity is a measure of output per input. The most common
measure would be labour productivity. For example, with improved
technology and education, a country can enjoy higher labour
productivity and therefore produce goods at a lower cost. Higher labour
productivity is the key to increasing competitiveness and living
standards at the same time.
Example, German v/s Italian labour productivity
During 1990-2005, Italian labour productivity growth tended to lag behind Germany,
leading to lower competitiveness of Italian exports. Between 1990 and 2005, Germany
labour productivity increased by 25 base points. UK labour productivity increased by
35 base points showing that the UK had faster improvements in labour productivity
during this period.
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 Factors that determine international
competitiveness
3. Exchange Rate
Movements in the exchange rate will determine competitiveness. For example, a sharp
depreciation will make exports cheaper and more competitive. An increase
(appreciation) in the exchange rate makes the foreign currency price more expensive.
Often movements in the exchange rate reflect relative costs. For example, if a country
has lower inflation, this will lead to an appreciation in the exchange rate, making
exports relatively more expensive. Thus a floating exchange rate helps to maintain
relative competitiveness levels.
However, sometimes economies can artificially maintain a lower value of the exchange
rate to maintain competitiveness. For example, China has been accused of exchange
rate manipulation. China buys large quantities of US securities; this causes an increase
in the value of the dollar and helps to keep the Yuan undervalued. Therefore, this
helps Chinese exports to be more competitive and explains the large Chinese current
account surplus

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competitiveness
4. Tax Rates
Tax rates on labour and corporations will be a factor in determining
competitiveness. For example, higher labour taxes will increase the unit
cost of labour faced by firms, leading to lower competitiveness.

5. Infrastructure
A key factor in determining competitiveness is the cost of transport. For
example, some argue the UK's competitiveness is undermined by
bottlenecks in transport, such as limited airport capacity in London and
traffic jams on major roads.

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 Factors that determine international
competitiveness
6. Cost of Doing Business
It is argued that countries with more labour market regulations and
regulations about doing business will have higher costs and lower
competitiveness. For example, the difficulty in gaining planning
regulations to expand a factory

The World Bank produces a list of countries which are the 'easiest places
to do business'. The criteria include factors such as flexibility of labour
markets, degree of regulations, and protection of private property.

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 Factors that determine international
competitiveness
6. Cost of Doing Business
Top 10 Ease of doing business as per World Bank Doing Business Report
2019

India ranked at 77th Rank as per World Bank Doing Business Report 2019

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