Download Examine the factors which affect the international

Examine the factors which affect the international
competitiveness of the UK’s goods and services (40 marks).
International Competitiveness is the ability of a nation to compete
successfully internationally and sustain improvements in real output and
wealth. The factors which affect the interantional competitiveness of the UK’s
goods and services are Price competitiveness and Non-Price Competitiveness;
Price competitiveness such as inflation, exchange rates and unit labour costs
and Non price competitiveness such as quality of UK’s goods and Income
Elasticity of Demand for UK’s exports and imports.
Inflation is an increase in the general level of prices of a given kind in a
given currency. If the inflation rate for UK is high then UK’s goods will be
expensive, therefore UK will be less price competitive. If the UK goods are
expensive as a result of higher inflation, then there will be less demand for
UK’s exports and increase in demand for Imports, which will result in a
balance of payment deficit. So the inflation rate should be controlled in
order to be price competitive. Many countries operate inflation target. The
UK’s inflation target is set for RPIX inflation at 2.5% plus l% or minus l%.
The Bank of England Monetary Policy Committee sets interest rates with
the objective to maintain stable or low level of inflation. However even if
the inflation rate for UK is high, when comparing with other countries, UK’s
inflation rate might be lower which means UK will be price competitive with
those countries.
Exchange rate is the rate between two currencies specifies how much
one currency is worth in terms of the other. If the exchange rate is higher
for UK’s sterling pounds then, the price of UK’s export will be high;
therefore demand for UK’s export will fall, therefore UK will be less price
competitive. Even if the exchange rate for the countries are same, there
will be cost involved as theere will be difference in currencies so if the
currencies and the exchange rate is same then there wont be any cost
involved as there is no need for converting the currencies therefore its
expensive for UK to buy goods from European countries as UK does not
hold the same currency as them, which is a disadvantage to the UK. A fall in
the exchange rate makes imported goods and services more expensive in
the UK. Producers may pass on higher costs of imported components of raw
materials onto consumers. The demand for imports should fall as imports
become more expensive. However, some imports are essential for
production or cannot be made in the UK and have an inelstic demand,
therefore UK end up with spending more on these when the exchange rate
falls in value. This can cause the blance of payments to worsen in the short
run.
Unit Labour Cost is defined as the cost of labour required to produce one unit
of output in a particular industry, sector or the aggregate economy. If the
labour costs in UK are high then the cost of production will be high, which in
turn mean the price of the good or service will be high in UK, therefore UK
will be less price competitive. However if UK decided to produce their
goods in a different country, where cheaper labour is available then cost of
production will fall but importing cost and transporting cost will increase. High
wage countries are often concerned about their relatively high level of labour
cost in producing particular goods and services compared to low wage
countries, in particular to the extent that such lower labour costs are the
result of lower taxation. On the other hand, low wage countries often complain
about tariff and non tariff measures of high wage countries that exports goods
and services in which low income countries have a comparative advantage.
These measures not only directly impact exports but also limit technology
transfer to developing countries through restricting imports. However the
difference in Unit Labour Cost levels across countries always depends on the
source from which the change came from. For example an increase in labour
cost may result from upward wage rate pressure or from a slowdown in
productivity growth. So a country can improve their competitiveness either
by decreasing its labour cost per person employed or raising the productivity
performance.
Quality of goods and services are non price competitive factors which affect
the international competitiveness of the UK’s goods and services. If the
quality of the UK’s goods and services are poor then there will be less
demand for UK’s goods as consumers would want a better quality good,
therefore UK’s goods will be less competitive. So consumers will seek for
better quality goods from other countries, therefore import will increase,
which might result in a balance of payment deficit. Also the economy will find
it more and more difficult to export whilst imports increase. There is
therefore a continual downward pressure on the exchange rate.
Income Elasticity Demand for UK’s exports and imports is also another non
price competitive factor which affects the international competitiveness of
the UK’s goods and services. Income Elasticity of Demand (YED) is the
percentage change in quantity demanded over percentage change in income.
If income in UK increases then most consumers would demand for luxury
goods rather than cheaper goods, therefore YED for imports will increase, as
these goods are provided with better quality as how they wanted, so these
imported goods are recognised as better goods and services than what is in
UK. Therefore UK is less competitive in non price competitiveness aswell.
However UK does not produce every type of goods and services such as retail,
so UK may not be able to compete with othr countries in this way. But UK is
more advanced in different goods such as organic goods, where other
countries may fall behind than UK so it depends on what goods the country is
producing. Also if imports for luxury goods increases then UK may try to
produce their goods with better quality so this will also encourage UK
producers to produce their goods as how the consumers want.
When looking at the price competitive factors, the most important factor is
the exchange rate as it affects everything including both exports and imports
of goods and raw materials. UK cannot produce goods without raw materials,
which are needed to be imported from other countries, but in order to buy
those raw materials, UK have to buy their currency then buy the raw
materials which costs a lot. Exchange rate also affects the export as if
exchange rate is too high then its really hard for UK to sell their goods. When
looking at the non price competitive factors, the most important factor is the
quality of UK’s goods. Even if the income increases, If the quality of UK’s good
is enough then the consumers will not seek for importing goods so its mainly
the quality of goods which is the non price competitive factor which affects
the international competitiveness of the UK’s goods and services.