Test Essay on International Competitiveness
Stephen Berkowitz
Economics - Unit 4
Test Essay - International Competitiveness
Question 3 June 2010:
3 (a) The UK fell from 9th to 12th place in the Global Competitiveness Index between 2007 and
2008. Examine the factors which might have caused the decrease in the international competitiveness of the UK’s goods and services (20)
A country’s international competitiveness in output markets is a measure of its ability to increase the sales of its goods and services in both its domestic markets and overseas markets compared to that of its trading rivals. I will be looking at the aspects of this that are price competitive.
The first factor I’ll look at is the real exchange rate and effective exchange rate. The real exchange rate is the nominal exchange rate multiplied by the ratio of relative prices between two countries.
Ceteris paribus, there will be a depreciation in the real exchange rate when either the nominal exchange rate falls or when a trading rival has a higher relative rate of inflation. This makes exports cheaper in foreign currency terms, and imports relatively more expensive in domestic currency terms - this will result in an increase in international competitiveness.
As the UK’s international competitiveness decreased, this could have been because of a rise in in the nominal exchange rate, as well as a higher relative rate of inflation, adverse to what the UK would have wanted in a bid to increase international competitiveness. The problem with the real exchange rate is that it can only be considered in comparison to one other trading rival, and so the view the UK economy as a whole, it may be more effective to use the effective exchange rate.
However, competitiveness might not necessarily fall following a rise in exchange rate if exporters cut profit margins.
The second factor that could have cause a decrease in the UK economy is relative unit labour costs.
This measures the labour costs in one country compared to those in another. Relative average
Economics - Unit 4
Test Essay - International Competitiveness
Question 3 June 2010:
3 (a) The UK fell from 9th to 12th place in the Global Competitiveness Index between 2007 and
2008. Examine the factors which might have caused the decrease in the international competitiveness of the UK’s goods and services (20)
A country’s international competitiveness in output markets is a measure of its ability to increase the sales of its goods and services in both its domestic markets and overseas markets compared to that of its trading rivals. I will be looking at the aspects of this that are price competitive.
The first factor I’ll look at is the real exchange rate and effective exchange rate. The real exchange rate is the nominal exchange rate multiplied by the ratio of relative prices between two countries.
Ceteris paribus, there will be a depreciation in the real exchange rate when either the nominal exchange rate falls or when a trading rival has a higher relative rate of inflation. This makes exports cheaper in foreign currency terms, and imports relatively more expensive in domestic currency terms - this will result in an increase in international competitiveness.
As the UK’s international competitiveness decreased, this could have been because of a rise in in the nominal exchange rate, as well as a higher relative rate of inflation, adverse to what the UK would have wanted in a bid to increase international competitiveness. The problem with the real exchange rate is that it can only be considered in comparison to one other trading rival, and so the view the UK economy as a whole, it may be more effective to use the effective exchange rate.
However, competitiveness might not necessarily fall following a rise in exchange rate if exporters cut profit margins.
The second factor that could have cause a decrease in the UK economy is relative unit labour costs.
This measures the labour costs in one country compared to those in another. Relative average