International Competitiveness

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Competitive Devaluations

A depreciation is when a currency's value falls in a floating exchange rate regime. A devaluation is when a currency's value falls in a fixed exchange rate regime. This is usually a decision taken by a government or a central bank.

Competitive devaluation

A competitive devaluation would see a government or central bank reduce the value of their currency by adjusting the currency peg.
A common hope is that by reducing the value of the currency, that nation's exports will become more price competitive and attractive to consumers in other nations.
Because exports are a component of GDP, a rise in exports could increase economic (or GDP) growth.
The nations leaving the Gold Standard in the 1930s after the Great Depression benefited from 'beggar thy neighbour' devaluations, as they reduced the value of their currency relative to those on the Gold Standard, benefiting from a rise in exports.

Competitive depreciation

A competitive depreciation would be a similar move to a competitive devaluation, but this happens in the free FX market.
It could be argued that Britain's exit from the EU, which saw sterling fall by 15% versus other currencies between June 2016-18 was a competitive depreciation. However, this was more accidental.

Impact on the current account

After a competitive depreciation or devaluation, the value of a currency falls.
Imports become more expensive and exports become more price competitive overseas. However, in the instant of the change, nations cannot change their consumption patterns (because of things like 30-day or 90-day contracts).
In the short term, the current account deficit will reduce as exports become cheaper and imports become more expensive.

Marshall-Lerner condition

The Marshall-Lerner condition states that a nation's balance of payments current account balance will only improve after a depreciation or devaluation if PED_exports + PED_imports >1. This improvement will come in the long run, but the J curve shows that in the short term, the situation will still get worse.

J-curve

Even if PED_exports + PED_imports >1, the current account will still get worse in the short run.
Demand tomorrow is more inelastic than demand in 1 year because people cannot switch to substitute goods because of things like contracts.
The J-curve shows things getting worse before they get better.

International Competitiveness

International competitiveness is a way of measuring productivity and the relative cost of goods and services produced in a nation.

Measures of competitiveness

Relative unit labour cost is the average cost of labour per unit of output in one country divided by the average cost of labour per unit of output in another country.
Relative export prices are the prices of exports from one nation relative to the prices of exports of another nation. This is usually calculated in an index.

Factors affecting competitiveness

Wage costs affect competitiveness. The higher wages are, the less competitive a nation is ceteris paribus.
High inflation will reduce competitiveness because prices are rising.
Higher labour productivity increases competitiveness because workers are producing more using the same inputs or in the same amount of time.
Real exchange rates (nominal exchange rate X (price level in UK/price level abroad) help to determine relative export prices. The real exchange rate takes price/inflation into account.
Any other costs incurred by firms, such as legal or admin costs can decrease competitiveness.
R&D and Technology can increase productivity and competitiveness, so government policies encouraging or subsidising this may be good.

Importance of being internationally competitive

Being internationally competitive can lead to a current account surplus in the balance of payments.
A current account surplus shows that (X-M), which is part of GDP is positive. A growing current account surplus can drive economic growth.
Increasing economic growth and exports can create employment in a nation.
Being internationally competitive can allow a firm to export internationally and benefit from economies of scale by increasing output to a higher level.

Issues with being uncompetitive

If a nation becomes more uncompetitive, imports become more expensive domestically. If a nation relies on imports then it can lead to increased cost-push inflation.
If the (X-M) component of GDP decreases then GDP shrinks. Slower or declining GDP growth can lead to unemployment in a nation.
Being uncompetitive may mean that businesses can only sell to their domestic market. This may stop them from benefiting from economies of scale.
Businesses that are internationally competitive and have economies of scale can be big national employers e.g. Nokia in Finland.

Ways to improve competitiveness

Policies that lower firms' wage costs, other costs or increase productivity can all boost competitiveness.
- Removing a minimum wage may lower labour costs, but it may cause a rise in inequality and poverty.
- Reducing legal and admin costs to businesses (and removing red tape) could make businesses more competitive, but it could reduce workers' health and safety. etc.

Ways to improve competitiveness cont.

A devaluation could make a nation's exports more attractive as the real (and nominal) exchange rate would fall.
Subsidies for R&D could lead to technological advances that raise labour productivity.
Subsidising production could lower businesses' costs but many subsidies are banned by organisations like the EU.
Creating a flexible labour market, with easy hiring and firing could reduce employment costs for businesses.