Unit 2. The competitiveness of a firm

2.1. The Performance of an Industry

Key words: economic growth, Gross Domestic Product (GDP), national income, business cycle, imports, exports, exchange rate, visible trade, invisible trade, balance of payments, current account, unit labour costs, inflation, retail prices index (RPI), producer price index (PPI), gross fixed capital formation, European Union (EU), customs union, tariff, General Agreement on Trade and Tariffs (GATT), World Trade Organisation (WTO), inward investment, outward investment

What is competitiveness?

All industries and firms face a world of increasing change as a result of growing foreign competition, increasing consumer power, and new technologies. To meet these challenges, an industry or a firm must be able to compete to win business in home and overseas markets. The performance of the economy and the standard of living in a country will ultimately depend on the ability of its firms to compete.

For a firm, competitiveness means meeting consumers’ needs more efficiently and more effectively than its rivals. For an economy as a whole, the Organisation for Economic Co-operation and Development (OECD) defines competitiveness as ‘the degree to which it can, under free and fair market conditions, produce goods and services which meet the test of international markets, while simultaneously maintaining and expanding the real incomes of its people over the long term’.

The ability of the firm to compete in international markets and to promote growth in total output and incomes, therefore, requires sustained improvements in productivity and product quality, and reductions in production costs at a rate which exceeds those of countries overseas.

There are a number of indicators of the changing competitiveness of a country as whole over time. Four of the most important and revealing indicators are changes in:

• Real Gross Domestic Product (GDP)

• Share of world trade

• Output per employee

• Unit labour costs

Gross Domestic Product

If all the firms in an economy manage to produce more goods and services in one year compared to the previous year, the result will be economic growth.

Gross Domestic Product (GDP) is a measure of the total value of all goods and services produced in a country per period. Because the production and sale of goods and services generates incomes for the owners of resources – i.e. labour and suppliers of materials and machinery – GDP is, therefore, a measure of the total or national income of a country. Also, because by definition the national income will be spent on goods and services, GDP is a measure of the total expenditure on goods.

Revenues from the sale of goods and services will tend to rise each year, simply because prices rise. Economists say this represents a rise in nominal GDP. However, in order for there to be economic growth, the total output of goods and services must also rise. That is, there must be an increase in real output, or real GDP. An increase in real GDP refers to an increase in the quantity and/or quality of goods and services available for an economy to enjoy, and therefore, an increase in real national income.

The continuous fluctuations in real GDP around a long term trend rate of growth are called the business cycle or trade cycle. Four stages can be identified in one complete cycle:

During an economic recession or slump real GDP tends to fall below trend. There is negative growth. Recessions are characterised by falling output and rising unemployment as a response to falling consumer demand and business investment. Price inflation tends to fall as firms cut prices in a bid to boost sales and maintain shares in shrinking markets. Business profits tend to fall and an increasing number of firms will close as the slump deepens. However, falling consumer demand for imported goods may improve the balance of international trade.

A trough occurs when the economy has reached the bottom of the business cycle. Consumer demand and business investment will be low but will have stopped falling. Unemployment will be high.

During an economic recovery incomes and demand start to rise. Stocks of goods will fall and businesses will respond by increasing output and their recruitment of staff. Unemployment will begin to fall. Growing business optimism may boost investment spending. However, growing demand will tend to suck in more imported goods and the balance of trade may deteriorate.

During a boom, real GDP will be rising above trend. Consumer demand, output, sales, and profits will all be buoyant. Unemployment will be low. However, if the supply of goods and services is unable to expand fast enough to meet demand, there will be price inflation.