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

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 . 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 1% or minus 1%. 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.

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Exchange rate is the rate between two 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.

Peer Reviews

Here's what a star student thought of this essay

groat

14th of Mar 2012

Quality of writing

The structure in this essay is strong. There is a clear introduction which defines the key terms which are to be explained, and the conclusion poses a judgement on the significance of factors. It was a shame to see a few spelling mistakes, and there are times where words are capitalised when they needn't be. For example "goods and services are Price competitiveness and Non-Price Competitiveness" - these aren't proper nouns and so don't need capital letters. A simple proof read should remove any of the spelling mistakes.

Level of analysis

The analysis in this essay is sound, and I like the progression in each paragraph. Each paragraph starts with a clear signpost stating why it is relevant to international competitiveness, and then goes onto define any terms if necessary. Being able to do this concisely is a good skill, and this essay does this well. There is then a clear analysis of why this factor affects international competitiveness. I would've liked to have seen a diagram somewhere in this essay, as it's an easy way to gain marks. Showing a shift in the demand and supply for pounds, possibly, changing the exchange rate would've sufficed if an explanation was given. It was good to see that the essay mentioned inflation rates only affect competitiveness if they are relatively higher than other economies. Being able to show this awareness will gain credit! I would've liked to have seen some trends discussed which were particular to the UK, as this shows the ability to apply knowledge. When talking about the quality of products, the essay could've gone much further in discussing structural issues in the UK economy. If I were doing this essay, I would've looked at comparative advantages and how the UK's has changed in recent years, affecting international competitiveness.

Response to question

This essay engages well with the question. There is a breadth of factors discussed here, and it's good to see such a wide knowledge. It was good to see a sustained awareness of the difference between price and non-price factors, as in my experience many people simply look at price being the strongest element. You cannot underestimate quality of products, and this essay does well in including this! This question doesn't explicitly ask for the extent to which each factor affects competitiveness, but this would've added to the conclusion.

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