UK INTERNATIONAL COMPETITIVENESS

UK International Competitiveness

Report Prepared on Behalf of: J A McGovern

Respond to: Margaret Sou

Table of Contents

INTRODUCTION3

1.CALCULATION OF BALANCE OF PAYEMENTS4

2. PROBLEM WITH THE BALANCE OF PAYMENTS6

3. DEVALUATION AND BALANCE OF PAYMENT PROBLEM7

4.1 RANGE OF MEASURES FOR IMPROVEMENT IN THE BALANCE OF PAYMENT DEFICIT8

4.2 1980 RECESSION10

REFERENCES12

UK international Competitiveness

Introduction

Competitiveness is the ability of a nation to compete successfully internationally and sustain improvements in real output and wealth. There is no unique measure of competitiveness. We can use tangible measures such as unit labour costs and long-run average growth of real GDP and qualitative indicators of the kind to be found in the IMD's Competitiveness League Table.

The chart above shows relative unit labour costs for the UK against our major trading competitors. A rise in the index signifies a worsening of Britain's competitive position. Clearly in the last few years we have see a sharp rise in relative unit labour costs. (Boltho 2006 pp.34)

The main explanation for this is the sustained appreciation in the value of the exchange rate against other currencies. This has caused problems for exporters and domestic businesses who face severe competition from imported goods and services. Another reason is the relatively slow growth of manufacturing productivity - raising questions about why certain British industrial sectors lag behind in productivity against their major competitors. (Boltho 2006 pp.34)

Calculation of Balance of Payements

The balance of payments is a record of all the financial dealings of the UK with the rest of the world. It can be split into two components:

The current account

The capital account

A summary of the UK Balance of Payments for 2008 (in $ billion)

Credits

Debits

Current Account

(1) Exports

646.03

(1.1) Merchandise

374.04

(1.2) Services

62.41

(1.3) Factor income

209.58

(2) Imports

-516.50

(2.1) Merchandise

-251.66

(2.2) Services

-111.83

(3.3) Factor income

-153.01

(3) Unilateral transfer

5.53

-14.37

Balance on current account

120.69

[(1) + (2) + (3)]

Capital Account

(4) Direct investment

3.27

-24.62

(5) Portfolio investment

73.70

-113.73

(5.1) Equity securities

16.11

-14.00

(5.2) Debt securities

57.59

-99.73

(6) Other investment

39.51

-109.35

Balance on financial account

-131.22

[(4) + (5) + (6)]

(7) Statistical discrepancies

4.36

Overall balance

-6.17

Official Reserve Account

6.17

2. Problem with the balance of Payments

Here are the figures for 2008 as released by the Office for National Statistics.

There was a record surplus on trade in services of £18.3 billion

But the highest ever recorded deficit of £57.6 billion on trade in goods.

Exports of goods and services were up by two per cent while imports rose by five and a half per cent to reach a record annual level

We ran a large net investment income surplus (of nearly £20 billion) partly offset by a negative transfers balance approaching £8 billion

Taken as a whole, the current account deficit was over £26 billion - just over 2.5% of national income

Problems

Two major export markets (the USA and the Euro Zone) have both experienced technical recessions at points in the last four years. The slow growth in the Euro Zone which account for over half of our merchandise exports is a problem for UK firms exporting to Western Europe

In contrast China accounts for only 1.2% of our exports, and eastern Europe only 2%

Investment Income: This is quite volatile from year to year ...