INTERNATIONAL COMPETITIVENESS

MEASURES OF COMPETITIVENESS

1. RELATIVE PRODUCTIVITY RATES – the labour productivity of each

country is measured against each other.
This is the output per hour worked. It measures how efficiently
labour is combined with the other factors of production.

A rise in relative productivity means that the country’s

productivity is rising faster than other nations. Compared to other
countries, the output per worker is growing.

A rise in relative productivity, provided that other factors remain

unchanged, will improve international competitiveness.

Multifactor productivity uses both labour and capital productivity

to measure the nations productivity. It reflects the overall
efficiency how a country combines both labour and capital.

2. RELATIVE UNIT LABOUR COSTS – this is the total wages divided by

real output – basically the average cost of labour to produce one
unit.
Eg: a firm employing 100 workers at $1000 each will cost them
$100,000. If these workers produce 50,000 units, then the unit
cost is $2.
$100,000
𝑈𝑛𝑖𝑡 𝑐𝑜𝑠𝑡 = = $2
50,000

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 If the labour productivity rises and they are able to produce
100,000 units.

$100,000
𝑈𝑛𝑖𝑡 𝑐𝑜𝑠𝑡 = = $1
100,000

The unit cost has fallen to $1. This makes them more competitive
in the international market.

Overtime, workers will demand for higher wage but at no increase

in their output. This will cause a rise in the unit cost of production
which will reduce their competitiveness.

3. RELATIVE EXPORT PRICES – These are the prices of exports

compared to the other countries. The export prices can rise due
to various reasons such as:
a. Increase in wages
b. Domestic inflation
c. Changes in technology
d. New laws that increase their cost

FACTORS INFLUENCING COMPETITIVENESS

1) PRODUCTIVITY – A rise in productivity can lead to a greater

output. This will reduce their unit cost allowing them to be more
competitive in the international market.

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 2) QUALITY OF HUMAN CAPITAL – this is made up of skills, talents,
education and training of the workers in the country. An
improvement of the quality of human capital will allow firms to
increase their labour productivity. This will increase their price
competitiveness for the firms.

Education and training will also improve non price

competitiveness. An educated workforce will be more innovative
in both product and process innovation.

3) EXCHANGE RATES – Appreciation and depreciation of the

exchange rate will cause a change in the pricing of the exports and
imports. These changes will affect the competitiveness of the
exports and imports in the foreign market.

4) WAGES AND NON-WAGE COSTS – In certain countries the wage

that is paid is very high compared to others. Non-wage costs such
as pensions, insurance, medical care can also affect the total costs
of the firm. These can increase their costs and affect the overall
competitiveness.

5) REGUALTIONS – Any increase in regulations will immediately

increase the cost of production. This will make the product less
competitive in the international market.

6) QUALITY OF INFRASTRUCTURE – This will affect the cost of

transportation within the country. It can add to the cost of
production making the product less competitive. Poor
infrastructure in roads, railways, air can also slow down the

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 production process. Problems with electricity can cause shutdown
in production intervals which can make the production process
much longer.

7) NON-PRICE FACTORS – These are any factor other than price that
will affect the consumer’s demand. These include design,
branding and quality. Any country that has better quality products
than their competitors will be able to sell products much more
efficiently.

MEASURES TO INCREASE INTERNATIONAL COMPETITIVENESS

1) IMPROVE EDUCATION AND TRAINING – The quality of education

can help to improve the level of output of a country. Spending on
training and education will allow the workers to expand their
output, engage in a wider range of jobs and increase the level of
innovation. Governments can provide:
a. Training programs for teachers
b. Digital learning
c. Firms can be given tax holidays or subsidies if they provide
training for their employees

2) INVESTMENT INCENTIVE – The government must encourage firms

and individuals to invest.
a. They can provide tax holidays and give subsidies to firms
that invest in research and development.
b. They can keep taxes on profits low.
c. Grants

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 3) PRIVATISATION AND DEREGULATION – This the sale of
government owned firms to the private sector. The private sector
is more efficient and profit motivated. They will be more efficient
in the use of their resources. This will make them more
competitive.
Old and outdated laws will be deregulated in order to encourage
the set up of new firms. This also helps them to reduce their
labour costs.

4) MEASURES TO DEPRECIATE THE EXCHANGE RATE – this will

reduce the export prices and increase the cost of imports.
Naturally, it will make the exports more competitive in the
international market.
However, deliberately reducing the exchange rate is considered a
form of protectionism. This can warrant a retaliation from other
countries.

5) TRADE LIBERALISATION
These are measures taken to remove the level of restrictions in
the country about international trade. The main aim is to increase
the level of competition.
When the level of competition is high, it will drive the businesses
to be more innovative and efficient. This will help them to keep
their costs down and increase the level of profitability.

6) TAXATION - Reduction of the level of taxation will encourage

companies to invest. This will lead to great output and innovation
from the country. It will help to improve the standard of exports
with regard to international competitiveness.

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 BENEFITS OF BEING INTERNATIONALLY COMPETITIVE

International trade will produce both winners and losers in companies,

countries and industries. The winners are those industries which are
more efficient. They can either produce at a lower cost (productive
efficiency) all they are able to innovate and introduce new technology
and thereby new products (dynamic efficiency).
Being internationally competitive provides the following benefits to the
country:
1) Current account surplus - an efficient country can produce in
large scale and earn far greater export income then their import
expenditure. This means that they will be able to enjoy a
persistent current account surplus. as a result, they can reduce
their current account deficit and even give out loans to other
countries.

2) Foreign currency - a high level of exports will help the country to

earn foreign currency. This will allow them to purchase more
imports, import capital goods that are needed to increase the
efficiency of their production. They can invest in research and
development to further their technological advances.

3) Inflow of foreign direct investments - this will bring foreign

currency as well as create an inflow of technology, knowledge and
skills that will improve the efficiency of the domestic firms.

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 4) Low unemployment - being internationally competitive means
that there is going to be more exports than the imports. in order
to produce excess exports, they will employ more workers. This
will create jobs in the domestic market.

5) Economic growth - higher level of exports will add up to the total

aggregate demand in the country. This will allow the country to
grow at a faster pace. People will be able to experience a higher
standard of living.

6) Wage growth - as there is a great demand for exports, there will

be an increase in the demand for workers. This will push up the
average wage rate in the country. All the workers will be able to
earn a greater income.

7) Higher domestic purchasing power - as consumers incomes are

rising faster than the local prices, their ability to purchase more
goods and services will increase. They will enjoy a greater number
of goods and services all be able to afford higher quality goods
and services.

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 PROBLEMS OF SUSTAINING INTERNATIONAL COMPETITIVENESS

1) For low- and middle-income countries, they will find it difficult to

sustain their low-cost advantage. As the country grows due to
export-led growth, their workers will start demanding for higher
wages. As a result, they will lose that low-cost competitive edge
after some time.

2) As the country becomes more and more developed, other costs

will also begin to rise. Raw material costs, cost of land will also
increase. This will make it difficult for them to maintain their cost
advantage.

3) Persistent current account surplus means that the country has

been able to keep up a higher level of exports than their imports.
This means that overtime their exchange rate will begin to
appreciate. This will make exports more expensive and imports
more cheaper to the domestic market. This can cause them to
lose their international competitiveness.

4) Less competitive countries may impose trade restrictions to your

exports. This will make your products less competitive in that
market.

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