International Competitiveness

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.

1Introduction to Markets

2Market Failure

2.1Market Failure

2.1.1Types of Market Failure

2.1.2Externalities

2.1.3The Deadweight Welfare Loss of Externalities

2.1.4A-A* (AO3/4) - The Externalities of Education

2.1.5Public Goods

2.1.6Information Gaps

2.1.7End of Topic Test - Market Failure

2.1.8Application Questions - Market Failure

2.2Government Intervention

2.2.1Government Intervention in Markets

2.2.2Subsidies & Price Controls

2.2.3Pollution Permits & Regulation

2.2.4A-A* (AO3/4) - European Emissions Trading

2.2.5State Provision & Information Provision

2.2.6Government Failure

2.2.7End of Topic Test - Government Intervention

2.2.8A-A* (AO3/4) - Government Intervention

3The UK Macroeconomy

3.1Measures of Economic Performance

3.1.1Measuring Economic Growth

3.1.2National Income Data

3.1.3Inflation

3.1.4Causes of Inflation

3.1.5Consequences of Inflation

3.1.6Employment & Unemployment

3.1.7Causes & Impact of Unemployment

3.1.8A-A* (AO3/4) - Hysteresis

3.1.9Balance of Payments

3.1.10Current Account Deficit & Imbalances

3.1.11End of Topic Test - Economic Performance

3.1.12Application Questions Macroeconomy

3.2Aggregate Demand

3.2.1Aggregate Demand

3.2.2Consumption

3.2.3Investment

3.2.4Government Expenditure

3.2.5Net Trade

3.2.6End of Topic Test - Aggregated Demand

3.2.7Application Questions - AD

3.3Aggregate Supply

3.3.1Aggregate Supply

3.3.2End of Topic Test - Aggregated Supply

3.3.3A-A* (AO3/4) -Aggregate Supply

3.4National Income

3.4.1National Income

3.4.2Injections & Withdrawals

3.4.3Equilibrium Level of Real National Output

3.4.4Multiplier Effect

3.4.5End of Topic Test - National Income

3.4.6Application Questions - National Income

3.5Economic Growth

3.5.1Causes of Economic Growth

3.5.2Output Gaps

3.5.3Business Cycle

3.5.4Impact of Economic Growth

3.5.5End of Topic Test - Economic Growth

3.5.6A-A* (AO3/4) - Growth

4The UK Economy - Policies

4.1Macroeconomic Objectives & Policies

4.1.1Possible Objectives

4.1.2Demand-Side Policies - Monetary

4.1.3Demand-Side Policies - Monetary 2

4.1.4A-A* (AO3/4) - The Future of Interest Rates

4.1.5Demand-Side Policies - Fiscal

4.1.6Demand-Side Policies in 2007-08

4.1.7Strengths & Weaknesses of Demand Side

4.1.8Supply-Side Policies

4.1.9Supply-Side Policies 2

4.1.10Conflicts Between Objectives

4.1.11A-A* (AO3/4) - Conflicting Incentives

4.1.12Phillips Curve

4.1.13End of Topic Topic - Policies & Objectives

4.1.14Application Questions - UK Policies

5Business Behaviour

5.1Business Growth

5.1.1Size & Types of Firms

5.1.2Business Growth

5.1.3Pros & Cons of External Expansion

5.1.4Demergers

5.1.5End of Topic Test - Business Growth

5.1.6A-A* (AO3/4) - Business Growth

5.2Business Objectives

5.2.1Business Objectives

5.2.2End of Topic Test - Business Objectives

5.2.3Application Questions - Business Objectives

5.3Revenues, Costs & Profits

5.3.1Revenue

5.3.2Costs

5.3.3Economies & Diseconomies of Scale

5.3.4Profits

5.3.5Profits 2

5.3.6End of Topic Test - Revenue, Costs & Profits

5.3.7A-A* (AO3/4) - Revenue, Costs & Profit

6Market Structures

6.1Market Structures

6.1.1Efficiency

6.1.2Perfect Competition

6.1.3Perfect Competition 2

6.1.4Monopolistic Competition

6.1.5Oligopolies

6.1.6The Prisoner's Dilemma

6.1.7Collusion in Oligopolistic Markets

6.1.8A-A* (AO3/4) - Which Factors Affect Collusion?

6.1.9Monopolies

6.1.10Price Discrimination

6.1.11Monopsony

6.1.12A-A* (AO3/4) - Models in Economics

6.1.13Contestability

6.1.14Benefits of Contestability

6.1.15End of Topic Test - Market Structures

6.1.16Application Questions - Market Structures

6.1.17A-A* (AO3/4) - Cereal Collusion

6.2Labour Market

6.2.1Demand for Labour

6.2.2Supply of Labour

6.2.3Labour Market Imperfections

6.2.4A-A* (AO3/4) - Labour Productivity & Unemployment

6.2.5A-A* (AO3/4) - What Level of Unionisation is Good?

6.2.6Wage Determination

6.2.7Elasticity of Labour Supply & Demand

6.2.8Intervention in Setting Wages

6.2.9End of Topic Test - Labour Market

6.2.10A-A* (AO3/4) - Labour Markets

6.3Government Intervention

6.3.1Reasons for Government Intervention

6.3.2Government Promotion of Competition

6.3.3Usefulness of Competition Policy & Examples

6.3.4A-A* (AO3/4) - Modern Competition Policy

6.3.5Privatisation

6.3.6Government Regulation

6.3.7A-A* (AO3/4) - Nationalisation vs Privatisation

6.3.8Government Protection of Suppliers and Employees

6.3.9Impact of Government Intervention

6.3.10End of Topic Test - Government Intervention

6.3.11Application Questions - Government Intervention

7A Global Perspective

8Finance & Inequality

8.1Poverty & Inequality

8.1.1Absolute & Relative Poverty

8.1.2Inequality

8.1.3Inequality 2

8.1.4Lorenz Curve

8.1.5Government Policy on Poverty

8.1.6End of Topic Test - Poverty & Inequality

8.1.7A-A* (AO3/4) - Inequality & Poverty

8.2Emerging & Developing Economies

8.2.1Measures of Development

8.2.2Factors Influencing Growth & Development

8.2.3Barriers to Development

8.2.4Barriers to Development 2

8.2.5A-A* (AO3/4) - The Bottom Billion

8.2.6Development Strategies

8.2.7Interventionist Strategies

8.2.8Aid

8.2.9International Institutions

8.2.10International Institutions 2

8.2.11End of Topic Test - Emerging & Developing

8.2.12Application Questions - Developing Countries

8.3The Financial Sector

8.3.1Role of Financial Markets

8.3.2Market Failure in the Financial Sector

8.3.3Role of Central Banks

8.3.4End of Topic Test - The Financial Sector

8.3.5A-A* (AO3/4) - Financial Sector

8.4Role of the State in the Macroeconomy

8.4.1Public Expenditure

8.4.2Taxation

8.4.3Public Sector Finances

8.4.4End of Topic Test - Role of the State

8.4.5Application Questions - Role of the State

9Examples of Global Policy

9.1International Policies

9.1.1Global Debt & Deficit Policies

9.1.2Poverty & Inequality Policies

9.1.3Changes in Interest Rates

9.1.4Competitiveness Policies

9.1.5End of Topic Test - International Policies

9.1.6A-A* (AO3/4) - International Policies

9.2Policy Responses to Shocks

9.2.1International Tax Policies

9.2.2Problems for Policymakers

9.2.3End of Topic Test - Policy Responses

9.2.4Application Questions - Policy Responses

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