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International competitiveness

Edexcel IAL Economics · WEC14 Developments in the Global Economy

International competitiveness is the ability of a country's firms to sell goods and services in world markets at a profit. The specification asks how it is measured, what determines it, how to improve it and why it matters.

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Measures

Relative productivity: output per worker or per hour compared with other countries.
Relative unit labour costs (ULC): ULC = total labour costs / output. Lower ULC than rivals means more price competitiveness. ULC rises if wages grow faster than productivity.
Relative export prices: an index of export prices compared with competitors' prices, in a common currency, so it includes exchange rate changes.

	Country A	Country B
Labour cost per worker per year	$40,000	$30,000
Output per worker per year (units)	2,000	1,200
Unit labour cost	$20	$25

Higher wages do not mean higher unit labour costs if productivity is higher

Factors that determine competitiveness

Productivity, driven by capital, technology and management.
Quality of human capital: education, skills, health.
The exchange rate: a stronger currency makes exports dearer.
Wage and non-wage costs: employer social contributions, pensions.
Regulation: red tape raises costs, though some regulation (property rights) helps.
Infrastructure: transport, energy, broadband.
Non-price factors: quality, design, reliability, brand, after-sales service.

Improving competitiveness

Education and training: raises productivity, though it takes years.
Incentives for investment: tax allowances and grants for capital and research.
Privatisation and deregulation: profit motive and competition raise efficiency; risks include private monopolies and weaker safety standards.
Reducing the exchange rate: quick but temporary and inflationary, and it does not raise productivity.
Trade liberalisation: competition forces efficiency and gives cheaper inputs.

Why it matters

Being competitive: export-led growth, current account surpluses, more FDI, jobs, higher living standards.

Being uncompetitive: current account deficits, structural unemployment, slower growth, pressure on the currency and on government finances.

Worked example

Using the table, which country is more price competitive in terms of labour costs?

A: 40,000 / 2,000 = $20 per unit
B: 30,000 / 1,200 = $25 per unit

Answer: Country A: although it pays higher wages, its unit labour costs are lower.

Key idea: Measures: relative productivity, relative unit labour costs, relative export prices. Determinants: productivity, human capital, exchange rate, labour costs, regulation, infrastructure, non-price factors. Improve with education, investment incentives, deregulation, a lower exchange rate, liberalisation.

Check yourself

A firm's total labour costs are $360,000 and it produces 24,000 units. Calculate the unit labour cost.
Show answer
$15. 360,000 / 24,000 = $15.
Wages rise by 6% and productivity rises by 2%. Calculate the percentage change in unit labour costs to 1 decimal place.
Show answer
3.9 %. ULC index = 1.06 / 1.02 = 1.0392, a rise of 3.9%.
Country X's unit labour cost index is 112 and its trading partners' average is 104 (same base year). Calculate X's relative unit labour cost index to 1 decimal place.
Show answer
107.7. 112 / 104 x 100 = 107.7: X's labour costs have risen faster than its partners'.
Which is a non-price factor affecting international competitiveness?
- Unit labour costs
- The exchange rate
- Relative inflation
- Product reliability and design
Show answer
Product reliability and design. Non-price factors include quality, design, brand and service.
Why is reducing the exchange rate often seen as a weak long-term way to improve competitiveness?
- It makes exports more expensive
- It does not raise productivity and its effect is eroded by higher inflation
- It always causes deflation
- It is banned by the WTO
Show answer
It does not raise productivity and its effect is eroded by higher inflation. Import prices and wages rise, eroding the price advantage.
Explain how spending on education and training can improve international competitiveness.
Show answer
It improves the quality of human capital, raising labour productivity, which lowers unit labour costs and improves quality, so exports become more competitive in price and non-price terms.. Human capital raises productivity.
Explain one problem for a country that becomes less internationally competitive.
Show answer
Exports fall and imports rise, so the current account worsens and jobs are lost in exporting and import-competing industries, causing structural unemployment and slower growth.. Loss of competitiveness hits trade and jobs.

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Sources

Pearson Edexcel International Advanced Level in Economics specification (issue 2)

Last updated 8 November 2026. Spotted a mistake? Tell us.