International competitiveness — Edexcel A-Level Economics A
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International competitiveness explained
International competitiveness is a country's ability to sell its goods and services abroad and to attract inflows of productive resources, relative to rival economies.
Read the full explanation
The main influences are the exchange rate, since an appreciation raises export prices in foreign currency and cheapens imports; relative unit labour costs, driven by productivity and wage growth; the domestic inflation rate compared with trading partners; the quality, design and reliability of output; the rate of innovation and technological progress; the efficiency of infrastructure, transport and logistics; the tax and regulatory burden on firms; and the openness of markets to trade and foreign direct investment. For example, if UK productivity per hour rises faster than wages, unit labour costs fall, so UK exports become cheaper in foreign currency and competitiveness improves.
Your focus
- Identify the main factors that influence a country's international competitiveness.
- Explain how a change in the exchange rate or in unit labour costs affects export and import prices.
- Distinguish price factors from non-price factors when judging competitiveness.
International competitiveness exam tips
Marking Points
- Identifies the exchange rate as a factor: an appreciation tends to reduce price competitiveness because exports cost more in foreign currency, while a depreciation tends to raise it.
- Explains relative unit labour costs: competitiveness improves when productivity growth outpaces wage growth, so cost per unit of output falls.
- Explains relative inflation: a higher domestic inflation rate than that of trading partners erodes price competitiveness over time.
- Recognises non-price factors such as product quality, design, innovation, infrastructure and the tax and regulatory environment.
- Links factors to outcomes: a fall in competitiveness tends to reduce export demand and worsen the current account, while improved competitiveness raises export demand.
Examiner Tips
- 💡Read the stem carefully to see whether it asks for a cause of improved or reduced competitiveness, then check the direction of each option.
- 💡Eliminate options that describe consequences of uncompetitiveness rather than factors that influence it.
- 💡For any option involving costs, ask whether productivity has been considered alongside wages before accepting it.
Common Mistakes
- Treating a depreciation as always making a country better off: the correction is that it improves price competitiveness but raises import prices and can worsen the terms of trade.
- Confusing the exchange rate level with the exchange rate regime: the correction is that the factor affecting competitiveness is the movement in the rate, not whether it is fixed or floating.
- Assuming low wages alone guarantee competitiveness: the correction is that unit labour costs depend on wages relative to productivity, so low-wage, low-productivity economies may still be uncompetitive.
- Ignoring non-price factors: the correction is that quality, design, reliability and delivery speed can sustain competitiveness even when prices rise.