A country’s “international competitiveness” refers to its ability to sell its goods and services in domestic and international market at a price and quality that is attractive in those markets. The UK fell from 9th to 12th place in The Global Competitiveness Index between 2007 and 2008. The factors causing the decrease can be divided into price and non-price factors. In order to improve the international competitiveness the firm can raise productivity and the government can imply a variety of supply-side policies.
Competitiveness is determined by a variety of factors but one of the most important is a country’s real exchange rate, which is nominal exchange rate adjusted for changes in price levels between economics. Real exchange rate= nominal exchange rate*domestic price level/foreign price level. There will be a depreciation in the real exchange rate if the nominal exchange rate falls or if the prices of goods abroad rise relative to prices in this country. Therefore, a fall in the real exchange rate will cause an increase in the competitiveness of a country’s goods. In contrast, the real exchange rate will increase if the nominal exchange rate rises or if the UK price level rises relative to the foreign price level. Consequently, an appreciation of the real exchange rate is associated with a fall in the country’s competitiveness.
Another important price factor affecting the international competitiveness is unit labour costs. To be specific, if wages are higher in the UK than in China, it is likely that the prices of the goods in the UK will be higher than those of China if productivity is ignored. Additionally, non-wages costs are also significant for international competitiveness, such as the national insurance contributions paid by employees, health and safety regulations and environmental regulations. The non-wages costs are always much higher in developed countries than developing countries so they reduce the...
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