1. Competitiveness spans both dimensions at once, so a country can win markets either by charging less or by offering something buyers value more.

Measuring Competitiveness

1. Both measures compare a country's position against that of its trading partners, usually as an index.
2. Unit labour cost can be written as: $$ULC=\frac{wages}{productivity}$$
   1. Unit labour costs therefore fall when productivity rises faster than wages, which improves competitiveness even if pay is rising.
3. Lower relative export prices make a country's goods more attractive abroad, raising export demand.

Factors Influencing Competitiveness

1. The exchange rate changes the price of exports and imports, so a weaker currency can raise price competitiveness.
2. Relative productivity is central, because higher output per worker lowers unit costs.
   1. The UK's long-standing productivity gap with rivals such as Germany and the United States has weighed on its competitiveness, while high-productivity exporters like South Korea have gained ground.
3. Wage and non-wage labour costs, such as pensions and social insurance contributions, feed into unit costs.
4. Relative inflation matters, since faster domestic inflation raises export prices against those of competitors.
5. Investment and innovation raise productivity and improve the quality of output.
6. Infrastructure quality, such as transport and digital networks, affects firms' costs and reliability.
7. Regulation and taxation influence business costs and the incentive to invest.
8. Education and skills raise the quality of the workforce and long-run productivity.
9. Non-price factors such as quality, design and reliability let firms compete even at higher prices, as with German engineering or Japanese cars.

Benefits of Being Competitive

1. A competitive economy can achieve export-led growth as firms win overseas markets.
2. Rising exports relative to imports can move the economy towards a current account surplus.
3. Stronger export demand supports higher employment.
4. Competitiveness can attract inward foreign direct investment (FDI).
   1. These gains tend to reinforce one another and support several macroeconomic objectives at once.

Problems of Being Uncompetitive

1. An uncompetitive economy tends to run a current account deficit as imports outpace exports.
2. Firms that lose sales to rivals shed workers, raising unemployment.
3. Weaker export demand drags on aggregate demand and leads to low growth.
4. A sustained loss of competitiveness can cause structural decline, as seen in parts of UK and US manufacturing.

Is a weaker currency the best way to improve competitiveness?

1. It can help because a depreciation immediately lowers export prices and raises import prices, improving price competitiveness at once.
2. But the gain can be temporary if the weaker currency feeds imported inflation that raises costs and erodes the price advantage.
3. It also does nothing for non-price competitiveness or the underlying productivity gap, which drive long-run success.
4. On balance, supply-side improvements in skills, investment and innovation are more durable, though slower and costlier, so the best approach depends on the time horizon.