4.1.9 International Competitiveness – Notes for Edexcel A

This page features notes for Edexcel A Economics A Level for topic 4.1.9 on international competitiveness.

Written by Tom Furber, an A-Level Economics tutor. Published 7th September 2026.

Contents

How to measure international competitiveness

International competitiveness is the ability of a country to sell its goods and services abroad. 

Here are two ways to measure international competitiveness mentioned in the specification:

• Relative unit labour costs
  • Unit labour cost refers to the cost of labour required to produce one unit of output.
  • It is calculated by dividing total labour costs by total output. 
  • Lower unit labour costs, relative to other countries, mean higher international competitiveness. 
  • This is because lower unit labour costs mean it is cheaper to produce a given amount of output. In other words, labour productivity is higher – a firm can produce more output with its available labour input.
• Relative export prices
  • This is calculated as the ratio of one country’s export prices to another country’s export prices. 
  • Lower relative export prices makes the country’s exports more price competitive. 

A weakness of these two measures is they do not directly take into account the quality of the goods and services being exported. We may also want to consider this when measuring international competitiveness.

Which factors influence international competitiveness?

Factors that influence international competitiveness include:

• Relative productivity
  • If workers are more productive in the UK relative to another country, then UK firms would be able to produce at lower average cost, other things being equal.
  • Another way to put it is unit labour costs would be lower.
  • Also productivity growth leads to the LRAS shifting right. This brings down the equilibrium price level relative to other countries without this productivity growth, increasing export demand.
  • Anything that influences productivity could affect international competitiveness. For example, the health and education levels of the workforce, relative to other countries.
  • Evaluation: Firms may not pass on cost savings to consumers by lowering prices, instead increasing profits to pay shareholders more dividends. So the price level may not fall relative to other countries. On the relative export price measure, international competitiveness would not increase.
• Relative inflation rates
  • Lower inflation in the UK relative to other countries would make UK exports appear relatively cheaper.
  • Hence, anything that changes UK inflation relative to inflation abroad can influence international competitiveness. For example, an increase in regulation in the UK relative to other countries.
  • Evaluation: differences in inflation rates between countries could reflect changes in relative quality of goods and services. For example if US exports become more expensive, this could reflect increasing quality e.g. of iPhones. This means higher domestic inflation relative to other countries may not necessarily worsen international competitiveness.
• The relative health and education levels of the workforce and regulations could influence productivity and inflation rate mentioned above.
  • For example a healthier workforce may be able to work with fewer health-related interruptions. This could shift the LRAS right, leading to a lower inflation rate.
  • If health improves in the UK relative to the US, this could therefore make UK exports more internationally competitive.
• Relative wage rates
  • Higher wages in the UK relative to other countries could increase business costs. This shifts SRAS left, leading to a higher price level in the UK relative to other countries. This increases UK export prices relative to other countries, reducing international competitiveness.
  • Evaluation: Higher wages could increase worker motivation, increasing productivity and cancelling out the effect of wage rises on unit labour costs and export prices.
• Regulation:
  • Regulation can increase business costs. Firms may need to hire lawyers to comply with regulation and other staff to fill in paperwork. This shifts SRAS left and may reduce the price level.
  • Also regulation means a greater proportion of workers’ time is allocated to filling in paperwork, rather than tasks to produce goods and services. This could reduce productivity, shifting LRAS left.
  • Note this is again a “relative” point. If all countries agreed to a new global regulation, this is less likely to affect international competitiveness. 
  • Evaluation: Some regulation (such as financial market regulation to prevent bank failure) could increase certainty and confidence among investors, leading to greater investment in companies. This could lead to more productive capital being created, lowering average costs, shifting SRAS right and hence bringing down export prices.
• Quality of exports.
  • Higher UK export quality could increase the demand for UK exports abroad, as consumers abroad receive higher utility from consuming the export.
  • Note quality may not be captured by the measures of international competitiveness mentioned earlier. Measures such as relative unit labour costs and relative export prices are instead about price and cost comparisons between countries, rather than quality.

Measures to increase a country’s international competitiveness

This is mentioned in section 4.5.4 of the Edexcel A specification. Since it relates most to international competitiveness, I have put this here.

Policies that could improve a country’s international competitiveness include:

• Supply-side policies.
  • This includes market-based supply-side policies such as deregulation and reductions in corporation or income tax rates
  • Interventionist supply-side policies such as government spending on education or infrastructure can also be used.
  • Supply-side policies aim to shift the LRAS right. This can lower the equilibrium price level, making exports more internationally competitive (provided other countries are not also engaging in the same policies).
  • Supply-side policy notes for analysis and evaluation points of each policy.
• Other policies to lower the rate of inflation by shifting AD left.
  • This could include contractionary monetary policy, such as a rise in interest rates.
  • Also this could include contractionary fiscal policy, for instance a cut in government spending.
  • These policies come with tradeoffs. In particular, a shift left in AD is likely to slow the rate of economic growth. With fewer goods being produced, there is less derived demand for labour. So unemployment may also increase.
  • More notes on monetary policy and fiscal policy

Here are a few policy examples in more detail:

Policy type	Advantages	Disadvantages
Deregulation Example: US removal of federal standards for car emissions.	Lower costs for businesses from complying with regulation. SRAS shifts right, so price level falls, so exports are cheaper (relative to other countries).  Can divert workers from filling out paperwork to productive activity. This shifts LRAS right. So the equilibrium price level falls, so exports are cheaper. Also unit labour costs may fall if productivity rises.	Deregulation could reduce worker protections. This could reduce worker motivation, leading to lower productivity.  Deregulation could have tradeoffs with other objectives. Removing environmental regulations could lead to greater pollution; removing workers’ rights could lead to an increase in income inequality.
Cuts to corporation tax rates Example: US making corporation tax cuts permanent.	Firms have higher after-tax profits, meaning more funds to invest in new capital or worker training. This could shift the LRAS right, leading to a lower equilibrium price level. This could increase demand for UK exports.	Reduction in tax revenue could increase the budget deficit, the growth rate of the national debt. This could lead to higher future debt interest payments. Firms may not reinvest extra after-tax profits if it instead goes to shareholders as dividends. This could increase income inequality.
Government spending on infrastructure. Example: HS2 in the UK.	Makes workers more mobile. So firms can access a greater pool of workers when hiring, allowing firms to find more productive workers better suited to the job. Less time spent stuck on the train for workers, which could increase productive capacity. LRAS shifts right as a result. So the equilibrium price level falls, making exports cheaper.	Time lag from paperwork and tunnelling under the ground. This could mean the LRAS does not shift right for a long time until the project is completed. Increase in budget deficit and the national debt from funding the infrastructure.
Reducing government spending Example: “Austerity” under the 2010-15 UK Government.	AD shifts left, leading to a lower equilibrium price level.	This could lead to tradeoffs. Less aggregate demand could mean less derived demand for labour, leading to higher unemployment.  The economic growth rate could also fall.
Higher interest rates Example: Bank rate in the UK rising from 0.1% in 2020 to 5.25% in August 2023.	Higher cost of borrowing and higher reward for saving can lower consumption, shifting AD left. This could bring down the equilibrium price level, leading to increased demand for exports.	Higher interest rates could lead to hot money inflows, boosting demand for the domestic currency. This could cause an appreciation, making exports more expensive and reducing demand for exports.

This all assumes other countries are not engaging in the same policies, which could cancel out their effect on international competitiveness.

There are other policies that could be used to increase international competitiveness. For example, a devaluation of the currency. This could make exports cheaper for foreign consumers. This could increase export demand, boosting exporter profits. This could give firms more profit to invest in increasing productivity. However, this is not a policy option in countries with floating exchange rates.

Could protectionism or free trade affect international competitiveness?

• Yes they can but be careful how you argue this policy, in particular relating to the standard tariff diagram.
• Consider the standard tariff diagram. A tariff increases the price of domestic goods and the price of imports – both are priced at the world price + tariff.
• So, in relative terms, the price of UK exports, relative to the price of exports from other countries to the UK (imports), has not changed.
• We would need to consider other effects of tariffs to get at changes in international competitiveness. For example, tariffs protecting infant industries, enabling them to expand and achieve economies of scale, lowering unit labour costs. 

What are the consequences of being internationally competitive?

1) Higher export demand. This can lead to higher value of net exports, reducing a current account deficit and even moving into current account surplus.

2) Higher net exports can increase aggregate demand, as net exports are a component of AD. This increases the rate of economic growth. 

3) Higher aggregate demand may increase the demand for labour needed to produce the extra goods (derived demand). So the level of unemployment may fall.

4) Attracting foreign direct investment. Companies may be more willing to invest to set up a factory in a country that’s internationally competitive, knowing they can produce at lower costs and export their goods at lower prices from that country.

The opposite applies if a country is internationally uncompetitive. This could reduce export demand, leading to slower economic growth. It could also reduce employment in export-led sectors. For example if there’s a reduction in demand for cars  produced in the UK, this could contribute to deindustrialisation. 

Practice question on international competitiveness in the style of Edexcel Economics A

Related resources for Edexcel Economics A