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 =  int’l competitiveness

2. International Competitiveness: Labour 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. Gov’t 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 R&D Encourage firms to focus on quality, not just prices