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Economics of Competitiveness
Competitiveness on the EdExcel A2
Economics Syllabus (June 2016)
• Students will be expected to
1. Consider measures of competitiveness: For
example: relative unit labour costs and relative
export prices
2. Understand factors influencing competitiveness
such as the exchange rate; productivity; wage and
non- wage costs; regulation
3. Examine government policy to increase
international competitiveness. For example:
measures to improve education and training;
incentives for investment; deregulation
Does the UK’s deficit suggest we are uncompetitive?
The UK’s external trade position has worsened considerably in recent years. Since
2013 the quarterly current account deficit for the UK has averaged 5% of GDP
-7.0
-6.0
-5.0
-4.0
-3.0
-2.0
-1.0
0.0 2009Q1
2009Q2
2009Q3
2009Q4
2010Q1
2010Q2
2010Q3
2010Q4
2011Q1
2011Q2
2011Q3
2011Q4
2012Q1
2012Q2
2012Q3
2012Q4
2013Q1
2013Q2
2013Q3
2013Q4
2014Q1
2014Q2
2014Q3
2014Q4
2015Q1
2015Q2
2015Q3
2015Q4
Trade balance (%, GDP)
Current account balance
(% GDP)
Key Terms: International (External) Competitiveness
External competitiveness is the sustained ability to sell goods and
services profitably at competitive prices in a foreign country
• Cost (price) competitiveness
• Key metric: Differences in relative unit labour costs (ULCs)
• Non-price competitiveness
• Product quality, design, reliability and performance, choice,
after-sales services, marketing, branding and the availability
and cost of replacement parts
• Non-wage costs:
• Environmental taxes e.g. minimum prices on carbon emissions
• Employment protection laws & health and safety regulations
• Statutory requirements for employee pensions
• Employment taxes e.g. employers’ national insurance costs
Hourly Labour Costs in the European Union
Key Point
Hourly labour costs are not the
same as unit labour costs because
they do not take into account
differences in labour productivity
Unit Labour Costs in the European Union
80.0
85.0
90.0
95.0
100.0
105.0
110.0
115.0
120.0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Index of Unit Labour Costs for Selected EU Countries, 2010 = 100
Euro area (19 countries) Germany Ireland Greece Spain Poland United Kingdom
Note the progress that countries such as Spain, Greece and Ireland have made in reducing
their unit labour costs – largely through a (painful) internal devaluation in their economies
How to Reduce Relative Unit Labour Costs
Relative unit labour costs will rise when
• A country’s exchange rate appreciates
• Wage costs rise relatively faster than other nations
• Labour productivity growth is relatively slower
Options for reducing relative unit labour costs
• Monetary policy aimed at a currency depreciation e.g. a
managed floating exchange rate
• Wage controls e.g. wage freezes in the public sector
• Supply-side measures designed to raise labour
productivity / efficiency
Competitiveness Issue for UK: The Productivity Gap
Labour productivity can be measured by GDP per hour worked and per worker, and growth
in GDP per hour worked. This chart shows GDP per worker for G7 countries in 2015
86.0
100.0
106.0
111.0 114.0 115.0 119.0
138.0
0.0
20.0
40.0
60.0
80.0
100.0
120.0
140.0
160.0
Japan UK(=100) Canada Germany Italy France G7 exc. UK US
GDP per worker employed
UK Productivity Growth has disappointed since 2007
Real output per person employed in the UK and G7 (excluding the UK)
80.0
85.0
90.0
95.0
100.0
105.0
110.0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Index of Constant price GDP per hour worked, 2007 = 100
UK G7 exc UK
Why does the UK economy lag on productivity?
Low rate of new capital
investment in the UK
Banking crisis affecting
lending to businesses
Possible slowing rates of
process innovation
Persistent and deep skills
shortages in key
industries
Relatively low levels of
market competition
Low aggregate demand
& high spare capacity –
under-utilizing resources
Countries with Best Competitiveness in 2015-2016
5.76
5.68
5.61
5.53
5.5
5.47
5.46
5.45
5.43
5.43
5.41
5.33
5.31
5.3
5.28
0 1 2 3 4 5 6 7
Switzerland
Singapore
United States
Germany
Netherlands
Japan
Hong Kong SAR
Finland
Sweden
United Kingdom
Norway
Denmark
Canada
Qatar
Taiwan, China
Global Competitiveness Index Value (Max Score = 7)
10th
Global Competitiveness Index (World Economic Forum)
The Global Competitiveness Index uses indicators which include:
Indicator Brief comment on the indicator
Effectiveness of institutions Protection of property rights, rule of law, corruption
Quality of infrastructure Quality of transport, communications, energy etc.
Macroeconomic performance Inflation, fiscal balance, government debt, growth
Health and primary education Malaria incidence, prevalence of HIV, mortality rates
Higher education and training Quality of teaching and attainment e.g. in Maths
Efficiency of goods & labour markets Intensity of competition, tariffs, other barriers
Technological readiness Internet use, availability of latest technologies
Sophistication of business Supplier quality, business clusters,
Innovation Patent applications, research & development spend
2015-16 Global Competitiveness Index (UK Rankings)
Indicator
UK ranking out of 144
countries
Overall
competitiveness
10th /144
Institutions
12th /144
(legal 6th)
Infrastructure
9th /144
(roads 29th)
Macroeconomic
environment
108th /144
(Government debt 123rd )
Labour market
efficiency
5th /144
(Quality of Maths & Science
43rd)
Technological
readiness
3rd /144
(Mobile broadband 16th)
Highlighted problems for businesses
• Access to finance for business
• Skills gaps in the workforce
Overview of Strategies to Improve Competitiveness
Competitive exchange rate – managed floating?
Competitive tax environment - getting the right mix
Investment in human capital
Increased research & development
Market competition to raise productivity
Stable macroeconomic environment
Investment in critical infrastructure + balanced growth
Competitiveness – Does Taxation Matter?
Competitiveness is affected by the exchange rate
65.0
70.0
75.0
80.0
85.0
90.0
95.0
100.0
105.0
110.0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
ERI
€ : £
$ : £
The exchange rate index (ERI) is a trade-weighted measure of sterling against a
basket of currencies – weighted by the share of UK trade with each country
Competitiveness – Importance of Human Capital
Returns to research and development and subsequent innovation depend
critically on the human capital base of countries, which determines their
capacity to recognize, assimilate, and apply new technologies
Skills Workplace training to increase people’s occupational mobility
Enterprise Programs for start-ups e.g. Start-Up Chile, Young Innovative
Companies in France, Entrepreneurship First (UK)
Mobility Housing market reforms to improve affordability and geographical
mobility
STEM Investment in improved access to and quality of teaching in STEM
subjects (Science, Technology, Economics!, Engineering and Maths)
Total Research and Development Spending, 2011–15
Total R&D spending include public and private sector R&D
Research and development expenditures are concentrated mostly in advanced economies and China,
followed by the large emerging market and middle-income economies (Source: IMF, April 2016)
Companies with the most US patents granted in 2015
This statistic shows how many patents had been assigned to businesses as of the end of 2015. IBM had
7,355 patents assigned to them at this time and was by far the leader in this respect.
7,355
5,072
4,134
2,900
2,835
2,627
2,455
2,242
2,048
1,956
1,938
1,838
1,774
1,757
1,627
0 1000 2000 3000 4000 5000 6000 7000 8000
International Business Machines Corp
Samsung Electronics Co Ltd
Canon KK
Qualcomm Inc
Google Inc
Toshiba Corp
Sony Corp
LG Electronics Inc
Intel Corp
Microsoft Corp
Apple Inc
Samsung Display Co Ltd
Taiwan Semiconductor Manufacturing Co
General Electric Co
Ricoh Co Ltd
Number of granted U.S. patents
Competitiveness – The Importance of Innovation
Innovation drives progress and, in economic terms, determines
productivity growth which in turn drives prosperity.
R&D Tax Credits (used
in Australia & South
Korea)
Patent Box Initiative –
10% corporation tax
(a UK Policy)
Public R&D and more
Funding for Higher
Education
Highly skilled migrants
policy e.g. skilled
coders
Nurturing an
entrepreneurial
culture
Increasing intensity of
competition within
markets
Innovation & Competitiveness – Creative Destruction
Innovation requires strong human capital, institutions and incentives
Three-
dimensional
printing
Big data Li-Fi
Driverless cars
Artificial
intelligence
Personalised
health
programmes
Gamification
Sharing
economy
Marketing
intelligence
Entrepreneurship is linked to the notion of creative destruction, described by
economist Joseph Schumpeter, whereby new enterprises enter the market and
encourage greater competition and innovation
Evaluating Fiscal Policy and Research / Innovation
Fiscal Support to Private Research and Development
(R&D), 2013 (Percent of GDP)
Subsidies lower the cost of research
Tax incentives can encourage
commercialisation of ideas
Lower employment taxes to
stimulate skilled migration
Lower capital gains taxes encourages
small businesses / start-ups
Special economic zones to attract research-
intensive businesses
Some options for fiscal policy incentives
Low capital investment can hold back competitiveness
Source: HDI report 2015, UNDP
Investment spending as a % of
GDP, average for 2005-2013
Gross fixed
capital formation
Gross fixed
capital formation
(% of GDP) (% of GDP)
China 47.3 Ghana 22.7
Mongolia 44.2 Norway 22.6
Ethiopia 35.8 Japan 21.7
Indonesia 31.7 Russian Federation 21.5
South Korea 29.7 Mexico 21.0
Bangladesh 28.4 Germany 19.8
Australia 28.3 Malawi 19.7
India 28.3 United States 19.3
Malaysia 26.9 South Africa 19.3
Singapore 25.9 Spain 18.5
Zambia 25.9 Brazil 18.2
Hong Kong, China (SAR) 23.9 Côte d'Ivoire 17.0
Uganda 23.8 United Kingdom 16.4
Vietnam 23.8 Ireland 15.2
Canada 23.7 Cuba 12.2
Chile 23.6 Greece 11.2
Key Evaluation Point: The quality of investment and the human capital
to use it productively is significant in the long run
Why Macro Stability Matters for Competitiveness
Price stability
• Lowers investor risk
• Relative export prices fall
• Reduces yields on long term
bonds for govt and businesses
GDP growth
• Size of market incentivizes
foreign direct investment
• Length of the pay-back period
for R&D is reduced
Financial stability
• Access to credit for SMEs
• Funding for infrastructure
spending (vital in long run)
-2.5
-2
-1.5
-1
-0.5
0
0.5
1
1.5
2
350
370
390
410
430
450
470
Q12003
Q12004
Q12005
Q12006
Q12007
Q12008
Q12009
Q12010
Q12011
Q12012
Q12013
Q12014
Q12015
Real GDP for the UK Economy
Growth, seasonally adjusted (%)
Levels, seasonally adjusted (£ billion)
Competitiveness – Agglomeration Economies in Cities
Source: Economist Intelligence Unit
Competitiveness – What Really Matters?
• Macro competitiveness has micro foundations
• Competitive markets and innovative businesses
• Skills, aptitudes and attitudes within the workforce
• Expanding opportunities for women entrepreneurs /refugees
• Recognition that infrastructure and innovation are crucial
• Increasingly – competitiveness will flow from smart
urbanization
• Competitive advantage comes from having
• Globally scaled businesses close to or at the technological frontier
• A culture of innovative business start-ups / social entrepreneurs
• A financial system that provides appropriate and affordable credit
for education, business research and funding for business expansion
• Reliance on currency depreciation / devaluation and wage
cuts is not a sustainable competitiveness strategy
• The most competitive countries have the highest minimum wages
• There is a continuous global battle for the most talented workers
• “Races to the bottom” e.g. in taxes and wages have limited impact
Policies to Improve International Competitiveness
Improving functioning of Labour Markets
• Investment in all levels of education and training
• Encouraging inward migration of skilled workers
• Improvements in management quality
Critical (Core) Infrastructure Investment
• Better motorways, ports, hi-speed rail, new sewers
• The Northern Powerhouse project
• Communications e.g. super-fast broadband, 4G networks
Supporting Enterprise / Entrepreneurship
• Improved access to business finance e.g. for start-ups
• Incentives for business innovation and invention
• Reductions in business red tape
Macroeconomic Stability
• Maintaining low inflation / price stability to help confidence
• A sustainable and more competitive banking system
• A competitive exchange rate v major trading partners
Analysis Diagram: Market Failure in Innovation
This is a good analysis
diagram to use to show the
under-investment in
research if R&D is regarded
as having positive
externalities.
The private optimum level of
research is at A where
MPB=MPC
Whereas from a society
point of view we would want
to take account of the
externalities. A corrective
incentive such as a subsidy
would help to lower the
private cost and expand
research to level B
Economic Growth using AD-AS Diagrams
General
Price Level
Real GDP
GPL1
AS1
Y1
AD1
Yp1
LAS1
A rise in a country’s
productive
potential is shown
by an outward shift
of long run
aggregate supply
(i.e. LAS1 to LAS2)
This means a higher
level of aggregate
demand can be
met because of an
increase in the
supply capacity
LAS2
AS2
AD2
Yp2Y2
Economics of Competitiveness

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Economics of International Competitiveness

  • 2. Competitiveness on the EdExcel A2 Economics Syllabus (June 2016) • Students will be expected to 1. Consider measures of competitiveness: For example: relative unit labour costs and relative export prices 2. Understand factors influencing competitiveness such as the exchange rate; productivity; wage and non- wage costs; regulation 3. Examine government policy to increase international competitiveness. For example: measures to improve education and training; incentives for investment; deregulation
  • 3. Does the UK’s deficit suggest we are uncompetitive? The UK’s external trade position has worsened considerably in recent years. Since 2013 the quarterly current account deficit for the UK has averaged 5% of GDP -7.0 -6.0 -5.0 -4.0 -3.0 -2.0 -1.0 0.0 2009Q1 2009Q2 2009Q3 2009Q4 2010Q1 2010Q2 2010Q3 2010Q4 2011Q1 2011Q2 2011Q3 2011Q4 2012Q1 2012Q2 2012Q3 2012Q4 2013Q1 2013Q2 2013Q3 2013Q4 2014Q1 2014Q2 2014Q3 2014Q4 2015Q1 2015Q2 2015Q3 2015Q4 Trade balance (%, GDP) Current account balance (% GDP)
  • 4. Key Terms: International (External) Competitiveness External competitiveness is the sustained ability to sell goods and services profitably at competitive prices in a foreign country • Cost (price) competitiveness • Key metric: Differences in relative unit labour costs (ULCs) • Non-price competitiveness • Product quality, design, reliability and performance, choice, after-sales services, marketing, branding and the availability and cost of replacement parts • Non-wage costs: • Environmental taxes e.g. minimum prices on carbon emissions • Employment protection laws & health and safety regulations • Statutory requirements for employee pensions • Employment taxes e.g. employers’ national insurance costs
  • 5. Hourly Labour Costs in the European Union Key Point Hourly labour costs are not the same as unit labour costs because they do not take into account differences in labour productivity
  • 6. Unit Labour Costs in the European Union 80.0 85.0 90.0 95.0 100.0 105.0 110.0 115.0 120.0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Index of Unit Labour Costs for Selected EU Countries, 2010 = 100 Euro area (19 countries) Germany Ireland Greece Spain Poland United Kingdom Note the progress that countries such as Spain, Greece and Ireland have made in reducing their unit labour costs – largely through a (painful) internal devaluation in their economies
  • 7. How to Reduce Relative Unit Labour Costs Relative unit labour costs will rise when • A country’s exchange rate appreciates • Wage costs rise relatively faster than other nations • Labour productivity growth is relatively slower Options for reducing relative unit labour costs • Monetary policy aimed at a currency depreciation e.g. a managed floating exchange rate • Wage controls e.g. wage freezes in the public sector • Supply-side measures designed to raise labour productivity / efficiency
  • 8. Competitiveness Issue for UK: The Productivity Gap Labour productivity can be measured by GDP per hour worked and per worker, and growth in GDP per hour worked. This chart shows GDP per worker for G7 countries in 2015 86.0 100.0 106.0 111.0 114.0 115.0 119.0 138.0 0.0 20.0 40.0 60.0 80.0 100.0 120.0 140.0 160.0 Japan UK(=100) Canada Germany Italy France G7 exc. UK US GDP per worker employed
  • 9. UK Productivity Growth has disappointed since 2007 Real output per person employed in the UK and G7 (excluding the UK) 80.0 85.0 90.0 95.0 100.0 105.0 110.0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Index of Constant price GDP per hour worked, 2007 = 100 UK G7 exc UK
  • 10. Why does the UK economy lag on productivity? Low rate of new capital investment in the UK Banking crisis affecting lending to businesses Possible slowing rates of process innovation Persistent and deep skills shortages in key industries Relatively low levels of market competition Low aggregate demand & high spare capacity – under-utilizing resources
  • 11. Countries with Best Competitiveness in 2015-2016 5.76 5.68 5.61 5.53 5.5 5.47 5.46 5.45 5.43 5.43 5.41 5.33 5.31 5.3 5.28 0 1 2 3 4 5 6 7 Switzerland Singapore United States Germany Netherlands Japan Hong Kong SAR Finland Sweden United Kingdom Norway Denmark Canada Qatar Taiwan, China Global Competitiveness Index Value (Max Score = 7) 10th
  • 12. Global Competitiveness Index (World Economic Forum) The Global Competitiveness Index uses indicators which include: Indicator Brief comment on the indicator Effectiveness of institutions Protection of property rights, rule of law, corruption Quality of infrastructure Quality of transport, communications, energy etc. Macroeconomic performance Inflation, fiscal balance, government debt, growth Health and primary education Malaria incidence, prevalence of HIV, mortality rates Higher education and training Quality of teaching and attainment e.g. in Maths Efficiency of goods & labour markets Intensity of competition, tariffs, other barriers Technological readiness Internet use, availability of latest technologies Sophistication of business Supplier quality, business clusters, Innovation Patent applications, research & development spend
  • 13. 2015-16 Global Competitiveness Index (UK Rankings) Indicator UK ranking out of 144 countries Overall competitiveness 10th /144 Institutions 12th /144 (legal 6th) Infrastructure 9th /144 (roads 29th) Macroeconomic environment 108th /144 (Government debt 123rd ) Labour market efficiency 5th /144 (Quality of Maths & Science 43rd) Technological readiness 3rd /144 (Mobile broadband 16th) Highlighted problems for businesses • Access to finance for business • Skills gaps in the workforce
  • 14. Overview of Strategies to Improve Competitiveness Competitive exchange rate – managed floating? Competitive tax environment - getting the right mix Investment in human capital Increased research & development Market competition to raise productivity Stable macroeconomic environment Investment in critical infrastructure + balanced growth
  • 15. Competitiveness – Does Taxation Matter?
  • 16. Competitiveness is affected by the exchange rate 65.0 70.0 75.0 80.0 85.0 90.0 95.0 100.0 105.0 110.0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 ERI € : £ $ : £ The exchange rate index (ERI) is a trade-weighted measure of sterling against a basket of currencies – weighted by the share of UK trade with each country
  • 17. Competitiveness – Importance of Human Capital Returns to research and development and subsequent innovation depend critically on the human capital base of countries, which determines their capacity to recognize, assimilate, and apply new technologies Skills Workplace training to increase people’s occupational mobility Enterprise Programs for start-ups e.g. Start-Up Chile, Young Innovative Companies in France, Entrepreneurship First (UK) Mobility Housing market reforms to improve affordability and geographical mobility STEM Investment in improved access to and quality of teaching in STEM subjects (Science, Technology, Economics!, Engineering and Maths)
  • 18. Total Research and Development Spending, 2011–15 Total R&D spending include public and private sector R&D Research and development expenditures are concentrated mostly in advanced economies and China, followed by the large emerging market and middle-income economies (Source: IMF, April 2016)
  • 19. Companies with the most US patents granted in 2015 This statistic shows how many patents had been assigned to businesses as of the end of 2015. IBM had 7,355 patents assigned to them at this time and was by far the leader in this respect. 7,355 5,072 4,134 2,900 2,835 2,627 2,455 2,242 2,048 1,956 1,938 1,838 1,774 1,757 1,627 0 1000 2000 3000 4000 5000 6000 7000 8000 International Business Machines Corp Samsung Electronics Co Ltd Canon KK Qualcomm Inc Google Inc Toshiba Corp Sony Corp LG Electronics Inc Intel Corp Microsoft Corp Apple Inc Samsung Display Co Ltd Taiwan Semiconductor Manufacturing Co General Electric Co Ricoh Co Ltd Number of granted U.S. patents
  • 20. Competitiveness – The Importance of Innovation Innovation drives progress and, in economic terms, determines productivity growth which in turn drives prosperity. R&D Tax Credits (used in Australia & South Korea) Patent Box Initiative – 10% corporation tax (a UK Policy) Public R&D and more Funding for Higher Education Highly skilled migrants policy e.g. skilled coders Nurturing an entrepreneurial culture Increasing intensity of competition within markets
  • 21. Innovation & Competitiveness – Creative Destruction Innovation requires strong human capital, institutions and incentives Three- dimensional printing Big data Li-Fi Driverless cars Artificial intelligence Personalised health programmes Gamification Sharing economy Marketing intelligence Entrepreneurship is linked to the notion of creative destruction, described by economist Joseph Schumpeter, whereby new enterprises enter the market and encourage greater competition and innovation
  • 22. Evaluating Fiscal Policy and Research / Innovation Fiscal Support to Private Research and Development (R&D), 2013 (Percent of GDP) Subsidies lower the cost of research Tax incentives can encourage commercialisation of ideas Lower employment taxes to stimulate skilled migration Lower capital gains taxes encourages small businesses / start-ups Special economic zones to attract research- intensive businesses Some options for fiscal policy incentives
  • 23. Low capital investment can hold back competitiveness Source: HDI report 2015, UNDP Investment spending as a % of GDP, average for 2005-2013 Gross fixed capital formation Gross fixed capital formation (% of GDP) (% of GDP) China 47.3 Ghana 22.7 Mongolia 44.2 Norway 22.6 Ethiopia 35.8 Japan 21.7 Indonesia 31.7 Russian Federation 21.5 South Korea 29.7 Mexico 21.0 Bangladesh 28.4 Germany 19.8 Australia 28.3 Malawi 19.7 India 28.3 United States 19.3 Malaysia 26.9 South Africa 19.3 Singapore 25.9 Spain 18.5 Zambia 25.9 Brazil 18.2 Hong Kong, China (SAR) 23.9 Côte d'Ivoire 17.0 Uganda 23.8 United Kingdom 16.4 Vietnam 23.8 Ireland 15.2 Canada 23.7 Cuba 12.2 Chile 23.6 Greece 11.2 Key Evaluation Point: The quality of investment and the human capital to use it productively is significant in the long run
  • 24. Why Macro Stability Matters for Competitiveness Price stability • Lowers investor risk • Relative export prices fall • Reduces yields on long term bonds for govt and businesses GDP growth • Size of market incentivizes foreign direct investment • Length of the pay-back period for R&D is reduced Financial stability • Access to credit for SMEs • Funding for infrastructure spending (vital in long run) -2.5 -2 -1.5 -1 -0.5 0 0.5 1 1.5 2 350 370 390 410 430 450 470 Q12003 Q12004 Q12005 Q12006 Q12007 Q12008 Q12009 Q12010 Q12011 Q12012 Q12013 Q12014 Q12015 Real GDP for the UK Economy Growth, seasonally adjusted (%) Levels, seasonally adjusted (£ billion)
  • 25. Competitiveness – Agglomeration Economies in Cities Source: Economist Intelligence Unit
  • 26. Competitiveness – What Really Matters? • Macro competitiveness has micro foundations • Competitive markets and innovative businesses • Skills, aptitudes and attitudes within the workforce • Expanding opportunities for women entrepreneurs /refugees • Recognition that infrastructure and innovation are crucial • Increasingly – competitiveness will flow from smart urbanization • Competitive advantage comes from having • Globally scaled businesses close to or at the technological frontier • A culture of innovative business start-ups / social entrepreneurs • A financial system that provides appropriate and affordable credit for education, business research and funding for business expansion • Reliance on currency depreciation / devaluation and wage cuts is not a sustainable competitiveness strategy • The most competitive countries have the highest minimum wages • There is a continuous global battle for the most talented workers • “Races to the bottom” e.g. in taxes and wages have limited impact
  • 27. Policies to Improve International Competitiveness Improving functioning of Labour Markets • Investment in all levels of education and training • Encouraging inward migration of skilled workers • Improvements in management quality Critical (Core) Infrastructure Investment • Better motorways, ports, hi-speed rail, new sewers • The Northern Powerhouse project • Communications e.g. super-fast broadband, 4G networks Supporting Enterprise / Entrepreneurship • Improved access to business finance e.g. for start-ups • Incentives for business innovation and invention • Reductions in business red tape Macroeconomic Stability • Maintaining low inflation / price stability to help confidence • A sustainable and more competitive banking system • A competitive exchange rate v major trading partners
  • 28. Analysis Diagram: Market Failure in Innovation This is a good analysis diagram to use to show the under-investment in research if R&D is regarded as having positive externalities. The private optimum level of research is at A where MPB=MPC Whereas from a society point of view we would want to take account of the externalities. A corrective incentive such as a subsidy would help to lower the private cost and expand research to level B
  • 29. Economic Growth using AD-AS Diagrams General Price Level Real GDP GPL1 AS1 Y1 AD1 Yp1 LAS1 A rise in a country’s productive potential is shown by an outward shift of long run aggregate supply (i.e. LAS1 to LAS2) This means a higher level of aggregate demand can be met because of an increase in the supply capacity LAS2 AS2 AD2 Yp2Y2

Editor's Notes

  1. The persistent weakness in productivity has puzzled economists and there are many alternative theories to explain it, including: weakness in investment that has reduced the quality of equipment employees are working with; the banking crisis leading to a lack of lending to more productive firms; employees within firms being moved to less productive roles; and slowing rates of innovation and discovery.