In the era of globalization, competition has become fiercer than ever. Reduced trade barriers, spread of technology and lower costs for communication and transportation have refined international competition. The UK’s international competitiveness measures the relative cost of British exports.
The impact of the financial crisis notwithstanding, the UK economy has grown strongly since 1997, outpacing the rest of the G7 with the exception of Canada in terms of growth in GDP per capita. This strong performance was not achieved by a significant increase in hours worked, but rather a sustained period of faster labour productivity growth relative to our competitors. During this time, the UK could have faced an improvement in their education and training which leads to improved skills and therefore increasing productivity. This means there’s more output per worker – this decreases the costs of production for firms, lowering the price and therefore causing international competitiveness to increase.
However, labour unit costs in the UK are very high due to the National Minimum Wage, meaning that labour costs per unit is high, causing higher wage costs, therefore meaning that the impact of productivity on increasing international competitiveness is limited to an extent. Non-wage costs like National Insurance contributions paid by employers, employment protection and anti-discrimination laws are frequently much higher in developed countries like the UK than in developing countries and so have the effect of reducing the international competitiveness of goods and services.
Competitiveness is determined by a variety of factors, but one of the most important is a country’s real exchange rate, which is the nominal exchange rate adjusted for price levels between economies. There will be a depreciation in the real exchange rate if the nominal exchange rate falls or price of