International competitiveness refers to a country’s ability to produce goods and services that meet global standards while sustaining or improving living standards.
Definition of international competitiveness
International competitiveness describes how effectively an economy can offer goods and services that perform well in international markets in terms of price, quality, innovation, and reliability. A country is considered internationally competitive when it is able to sell more exports than imports while maintaining high levels of productivity, living standards, and employment.
Competitiveness is a broad concept that goes beyond simply producing at low cost. It also includes technological capabilities, business environment quality, infrastructure efficiency, and the education level of the workforce. A highly competitive economy adapts quickly to changing global conditions and continuously improves its production processes and products to meet evolving consumer demands.
Competitiveness can be measured at various levels:
Firm level: Ability of a business to compete with domestic and international rivals.
Industry level: Ability of an entire sector to maintain global market share.
National level: An economy’s overall ability to improve prosperity through strong performance in international trade.
Measures of international competitiveness
Several indicators are used to assess the competitiveness of a country’s economy. Two key measures used in A-Level Economics are relative unit labour costs and relative export prices.
Relative unit labour costs (ULCs)
Unit labour costs are a measure of the cost of labour required to produce one unit of output. This is calculated as:
Unit Labour Cost = Total Labour Costs / Total Output
Relative ULCs compare a country’s ULCs with those of its trading partners. If a country's relative ULCs fall, its exports become cheaper and more competitive in international markets.
Formula for Relative ULC:
Relative ULC = (Domestic ULC / Foreign ULC) × 100
A value below 100 indicates that a country's labour costs are lower than its competitors, suggesting greater international competitiveness.
A value above 100 indicates higher labour costs and potential loss of competitiveness.
Factors influencing unit labour costs:
Wage levels: Higher wages increase labour costs unless matched by productivity gains.
Labour productivity: More output per worker reduces ULCs.
Exchange rates: An appreciation of the domestic currency can increase relative ULCs when converted to foreign currency.
Relative export prices
Relative export prices compare the price of a country’s exports to those of its international competitors. This reflects price competitiveness.
Formula for Relative Export Price:
Relative Export Price = (Domestic Export Prices / Competitor Export Prices) × 100
A fall in relative export prices makes a country's goods more attractive to foreign buyers, improving competitiveness.
A rise in relative export prices suggests reduced competitiveness unless justified by higher quality or added value.
However, price is not the only determinant of success. In many markets, branding, reliability, after-sales service, and product design play critical roles in determining demand for exports.
Factors affecting international competitiveness
International competitiveness is shaped by a wide range of structural and policy-related factors:
Productivity
Productivity refers to the amount of output produced per unit of input, especially labour.
High productivity means that goods can be produced more efficiently, reducing costs and increasing price competitiveness.
Productivity is influenced by:
Technological advancements.
Skilled and motivated workers.
Investment in capital equipment and processes.
Education and skills
An economy with a highly educated and skilled workforce tends to have more innovative, adaptable, and efficient firms.
Skilled workers can operate complex machinery, implement new technologies, and contribute to product and process innovation.
Quality education systems also support long-term economic resilience by preparing future generations for a dynamic global economy.
Infrastructure
Good infrastructure (e.g. transport networks, ports, digital connectivity, and energy supply) is essential for reducing costs and delays in production and distribution.
Poor infrastructure increases transaction costs, damages reliability, and undermines competitiveness.
For example, congested ports or unreliable electricity supply can delay exports and discourage foreign investment.
Regulation
Excessive or poorly designed government regulations can act as a barrier to competition and innovation.
Heavy administrative burdens raise production costs and reduce incentives to invest.
Effective regulation ensures labour rights and safety, but overregulation may reduce efficiency.
Innovation and research and development (R&D)
Innovation enables firms to differentiate their products, increase efficiency, and create new markets.
Countries that invest in R&D can build a competitive advantage through patented technologies, advanced production techniques, and improved customer experiences.
Government support for innovation, such as grants or tax credits, can enhance competitiveness.
Exchange rates
Exchange rate movements affect the price of exports and imports.
A depreciation of the domestic currency makes exports cheaper and more competitive abroad.
An appreciation makes exports more expensive and can reduce demand in foreign markets.
However, exchange rate changes also affect import costs, inflation, and profitability.
Significance of international competitiveness
The level of competitiveness has wide-ranging impacts on an economy’s performance and future prospects.
Benefits of strong competitiveness
Economic growth
Competitive economies tend to export more, supporting higher aggregate demand.
Increased exports contribute directly to GDP growth and stimulate investment in expanding production capacity.
Employment
As firms become more successful in global markets, they often increase output and hire more workers.
Competitive industries generate secure, well-paid jobs, reducing unemployment.
Attracting foreign investment
Competitive economies are attractive to international investors seeking:
Access to efficient production facilities.
Skilled labour.
Reliable infrastructure and political stability.
Inflows of foreign direct investment (FDI) provide capital, technology transfer, and access to new markets.
Trade balance improvement
Strong competitiveness supports a positive trade balance, where exports exceed imports.
This can reduce reliance on foreign borrowing and improve currency stability.
Problems of uncompetitiveness
Trade deficits
Weak competitiveness often results in persistent current account deficits.
High levels of imports relative to exports increase reliance on foreign financing and can lead to external debt accumulation.
Inflation
Countries that cannot compete effectively may rely on imported goods.
If the exchange rate weakens, imported inflation rises, reducing real incomes.
Firms may pass higher input costs on to consumers, further exacerbating inflation.
Deindustrialisation
Industries unable to compete globally may shrink or disappear, particularly in manufacturing.
This leads to structural unemployment, especially where workers lack the skills to move into new sectors.
Entire regions may suffer economic decline, leading to social problems and widening inequality.
Government policies to improve competitiveness
Governments can adopt a range of policies to strengthen competitiveness, focusing on long-term improvements in productivity, education, and the business environment.
Supply-side reforms
These aim to improve the efficiency, flexibility, and productivity of the economy.
Labour market reforms
Making it easier to hire and fire workers encourages firms to adjust employment levels in response to economic changes.
Reforms might include:
Reducing employment protection legislation.
Simplifying workplace regulations.
Promoting flexible working practices.
Deregulation
Cutting unnecessary red tape makes it easier for businesses to operate.
Lower regulatory burdens reduce the cost of compliance and increase incentives to invest.
Tax policy
Reducing corporation tax can attract investment and allow firms to retain more profits for reinvestment.
Offering tax incentives for innovation, training, and capital investment can support productivity growth.
Currency policy
Some governments may seek a competitive exchange rate to stimulate exports.
They may achieve this through:
Lower interest rates to reduce demand for the currency.
Foreign exchange market intervention, buying or selling currencies to influence the exchange rate.
Risks include:
Imported inflation due to higher import costs.
Retaliation from trade partners, potentially leading to currency or trade wars.
Investment in education and training
High-quality education systems are essential for developing a skilled, adaptable workforce.
Government spending on:
Primary and secondary education.
Vocational training.
Adult skills development.
Ensures workers can shift into growing industries and improve productivity across sectors.
Infrastructure investment
Government projects to improve:
Transport networks (roads, rail, ports).
Energy supply (reliable and sustainable electricity).
Digital connectivity (broadband and mobile networks).
Enhance efficiency, reduce costs, and support both domestic and export-oriented firms.
Innovation support
Public funding for scientific research and collaboration between universities and industry can generate technological breakthroughs.
Policies that support intellectual property protection and reduce barriers to commercialisation can encourage more private-sector R&D.
Understanding international competitiveness helps students see how microeconomic and macroeconomic forces interact in a global context, and how policy choices shape long-term economic outcomes.
FAQ
International competitiveness plays a key role in shaping a country’s long-term economic development by fostering sustained growth, productivity gains, and rising living standards. When an economy is competitive, it attracts investment, stimulates innovation, and secures a stable export base. These factors contribute to increasing the productive potential of the economy over time. Competitive industries drive higher value-added output, which supports higher wages and better employment prospects. Additionally, a strong external sector reduces reliance on volatile capital inflows, enhancing economic stability. Competitiveness also encourages firms to continually improve efficiency, adopt new technologies, and engage in global supply chains, which deepens integration into the global economy. However, long-term development requires that competitiveness is balanced with inclusivity—ensuring that benefits are shared across regions and social groups. Infrastructure upgrades, education reforms, and support for lagging industries are necessary to sustain competitiveness and avoid uneven development or entrenched structural unemployment. Thus, competitiveness is a cornerstone of dynamic and inclusive development.
Even with improved international competitiveness—such as lower unit labour costs or falling export prices—export growth may not materialise if external demand conditions are weak. For instance, during a global downturn or recession, demand for imports falls regardless of how competitive a country’s exports become. Additionally, improvements in competitiveness may take time to translate into actual trade deals, particularly in sectors with long-term contracts or where buyer-supplier relationships are well established. Non-price factors such as brand reputation, product standards, and customer service also influence trade flows; lower prices alone might not be enough to attract buyers if these qualitative aspects lag behind. Trade barriers, like tariffs or non-tariff regulations, imposed by importing countries may further restrict export potential. In some cases, domestic capacity constraints—such as labour shortages or outdated infrastructure—can prevent firms from scaling up output to meet new international demand. Therefore, multiple conditions must align for competitiveness gains to result in robust export growth.
Demographic trends significantly affect a country's international competitiveness by shaping its labour supply, consumer base, and productivity potential. A youthful and growing population can expand the labour force, offering firms a broad pool of workers, which helps keep labour costs stable and supports long-term economic growth. Additionally, a younger workforce is often more adaptable, technologically proficient, and open to innovation, which enhances productivity. Conversely, an ageing population can lead to a shrinking workforce, pushing up wage costs and placing pressure on public finances through higher pension and healthcare spending. This can reduce competitiveness by making labour more expensive and shifting resources away from productivity-enhancing investments. Migration patterns also play a key role; skilled immigration can address shortages and boost innovation, while brain drain—where talented workers emigrate—can undermine competitiveness. Countries must therefore align their education, training, and immigration policies with demographic realities to maintain or enhance competitiveness over time.
Environmental sustainability increasingly shapes international competitiveness, especially as global markets and regulations demand cleaner, greener production. Firms that adopt sustainable practices can reduce waste, increase energy efficiency, and lower long-term operating costs, giving them a competitive edge. Green credentials are becoming vital for access to certain markets, particularly within the European Union, where environmental standards are stringent. Consumers also increasingly favour products with low carbon footprints, eco-friendly packaging, and ethical sourcing, boosting demand for sustainable goods. Moreover, governments and international institutions offer incentives, subsidies, or favourable financing to firms that invest in clean technology or transition to renewable energy. However, the transition itself may impose short-term costs, especially for industries reliant on fossil fuels or outdated infrastructure. Countries that fail to invest in sustainability risk trade penalties, such as carbon border taxes, or exclusion from environmentally conscious markets. Thus, integrating sustainability into industrial strategy is now an essential component of long-term competitiveness.
Institutions—such as legal systems, regulatory bodies, and governance frameworks—play a foundational role in supporting or undermining international competitiveness. Strong institutions promote the rule of law, protect property rights, and enforce contracts, all of which create a stable environment for business investment and innovation. When businesses trust that laws are transparent and consistently enforced, they are more willing to invest in long-term projects that enhance productivity and competitiveness. Efficient institutions also reduce bureaucratic delays, simplify licensing processes, and limit corruption, which lowers the cost of doing business. In contrast, weak institutions can lead to inefficiencies, unpredictability, and rent-seeking behaviour, deterring both domestic entrepreneurship and foreign direct investment. Furthermore, institutional quality influences how well governments implement competitiveness-enhancing policies such as tax reform, education investment, or infrastructure development. Ultimately, institutional strength determines whether competitive advantages are sustainable, especially in a global economy where investor confidence and ease of doing business are critical to success.
Practice Questions
Explain two factors that may affect the international competitiveness of the UK economy.
One factor affecting UK competitiveness is relative unit labour costs. If wage growth outpaces productivity, unit labour costs rise, making UK exports less price-competitive. A second factor is infrastructure quality. Efficient transport and digital systems lower production and delivery costs, enhancing reliability and reducing lead times. Poor infrastructure, on the other hand, can create delays and increase costs for businesses, undermining competitiveness. Both factors influence firms’ ability to compete internationally on cost, quality, and service.
Evaluate the significance of international competitiveness for the UK economy.
International competitiveness is crucial for sustaining economic growth, increasing exports, and attracting foreign direct investment. A competitive economy supports higher employment and income through export-led growth. It also strengthens the current account by reducing trade deficits. However, competitiveness is not the sole determinant of economic success. Non-price factors like product quality and innovation also matter. Moreover, policy trade-offs may arise, such as lower wages reducing costs but harming living standards. Ultimately, while vital, competitiveness must be balanced with inclusive growth, sustainability, and long-term productivity improvements to ensure widespread economic benefits.
