How competitive is the UK economy

When talking about competitiveness we are talking about comparative advantage when comparing the UK with the rest of the world. Comparative advantage of one country over another occurs when a certain country can produce a good at a lower opportunity cost i.e. if it has to forgo less of other goods in order to produce it.

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There are certain goods and services in which Britain does have a certain comparative advantage and does it is favourable to trade with other countries on certain terms. An example of this is in the production of Heavy duty manufacturing building equipment in particular diggers by the British company JCB. This market is a duopoly almost with JCB and the American firm Caterpillar having a very large share of the world market. We can see that JCB equipment is still being built in this country because it must have a certain level of comparative advantage maybe in terms of skills of the labour force or the technology within the country which means that it is still profitable to produce the item in the UK. However this can work against the UK as well, which is seen by the movement of call centres from the UK to India, due to comparative advantage. This arises due to labour cost difference between the 2 countries, because India has a massive labour cost advantage over the UK an as a result it has a lower opportunity cost: UK is not competitive in call centres.

Furthermore in most manufacturing industries UK is not very competitive except in a select few areas. This could be down to the high exchange rate in the UK. This will mean that our exports will be more expensive than other competitors and as a result more people will buy the goods from our competitors rather than us. A clear example of this is the exchange rate between the � and the $ with �1 buying me $1.67 dollars (Tuesday’s price). At certain times during the last year �1 could buy me $1.50 dollars, which was when the pound was weak and this greatly helped exporters sell products to the US because they were lower in cost. However this mainly applies to low technology goods in which the cost is the most important factor. Nonetheless there are other certain industries where the exchange rate does not matter as much, like the market for luxury cars like Rolls Royce, Bentley and TVR. These are high value goods, with near to perfect inelastic price elasticity of demand.

Inflation is another factor that can affect the competitiveness of a country. However the British inflation rate is kept fairly constant by the Bank of England, also the level of inflation in the UK is quite comparable to the Euro zone, Japan and US and so in the present global environment the inflation rate does not have an immense effect on the competitiveness of the UK economy.

Moreover the UK is very strong in the service sector of the global economy with British services seen as having a very high standard. These services include financial consultants and management consultants around the world. The British have a very good education system and the British people it self are highly valued. The human resources in effect are of a very high standard, which are brought about by the huge sums of money that the government has invested into education and training. This is something that Britain does have a competitive edge in.

There is also good research and development within the UK by certain UK businesses which is good, but still a bit worrying because only a few UK firms spend close to the amounts needed to maintain their position as world leaders e.g. GSK and Vodafone. The vast majority of British firms are not investing enough in the future of their businesses and as a result are being leapfrogged by technology from the Asian Tiger economies.

In conclusion I feel that Britain is quite a competitive country in certain aspects of the world economy, however more should be done to minimise labour costs as well as encourage far greater sums to be invested in R&D.

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