International competitiveness: The Real Exchange Rate

1
International competitiveness The Real Exchange
Rate

• Nominal exch. rate x ratio of UK prices to
  foreign prices
• Real exch. rate ? if a) nominal exch rate rises
  b) UK prices rise relative to foreign prices
• So ? real exch. rate ? intl competitiveness

2
International CompetitivenessLabour productivity

• Labour productivity high productivity ? ? ave.
  costs ? ? relative export prices
• Any increases in labour productivity must not be
  offset by higher relative unit labour costs or
  the competitive advantage will be lost

3
Determinants of Relative Unit Labour Costs

• Macroeconomic stability encourages capital
  investment
• Level of human capital skills education
• Capital investment UK has tended to
  under-invest in long-run infrastructure
• Labour market flexibility lack of competition
  in labour markets raise wage rates (workers
  bargain harder) UK unemployment is very low

4
Other contributors to Competitiveness

• Quality
• Innovation
• Niche / specialty / unique area of expertise
• Macroeconomic stability
• Levels of corruption how reliable / transparent
  is it when doing business with the UK?

5
Govt Policy to Improve Competitiveness

• Low inflation target for MPC create stability
  low cost pressures for industry promote
  investment
• Encourage flexible labour market reduce work
  lost through industrial action
• Reduce red tape corp. tax (recent ? NI
  contributions have ? business costs)
• Promote knowledge driven economy education,
  lifelong learning, ICT training etc.
• Tax incentives for RD
• Encourage firms to focus on quality, not just
  prices