The UK’s lack of competitiveness is the biggest factor limiting economic growth. Discuss.
The UK’s lack of competitiveness is a very big factor limiting economic growth. The factors which might have caused a decrease in the international competitiveness of the UK include: the high cost of labour, increase in the value of the Pound Sterling and a decline in productivity relative to other countries. However, the Eurozone crisis and low interest rate are also significant in limiting the UK’s economic growth.
One reason for the UK’s lack of competitiveness being a big factor in limiting economic growth is high labour costs. This is because increases in wages are likely lead to an increase in the price of goods and services in the UK economy, due to the fact that firms need to cover their costs in order to avoid making losses and potentially shutting down. As a result, export prices are increased, making imports from other foreign economies relatively cheaper. Thus, this limits economic growth because foreign economies would import fewer goods and services from the UK economy, therefore reducing the circular flow of income in the economy and government revenue.
However, one could argue that UK firms may decide to relocate to countries which have relatively lower labour costs than the UK- this would reduce the level of productivity and thus GDP in the UK, as workers become redundant, which limits economic growth. One could argue also that not many UK firms would relocate because of the great base of consumers they have in the UK. More so, high labour costs could enhance economic growth in the long run. This is because workers receive higher incomes, thus there would be more consumer expenditure in the UK economy. As a result, businesses would gain more profit which could be used for further research and development which is an additional factor of increasing competitiveness. Thus, there may be economic growth in the UK in the long run due to high labour costs.
Another reason for the UK’s lack of competitiveness being a big factor in limiting economic growth is the increase in the value of the Pound Sterling. This is because a rise in the value of the Pound means that it costs foreigners more to buy the Pound with their local currency. As a result, this makes exports from the UK less price competitive, hence the UK exports fall. More so, a rise in the value of the Pound will encourage more imports from abroad as foreign goods and services appear cheaper. As a result, the operation of UK firms would reduce and some may even shut down because of a decrease in domestic and foreign aggregate demand. Thus, this limits economic growth because a higher exchange rate will reduce investment and FDI in the UK as investors will be making only small gains due to lack of production.
However, the extent to which there is competitiveness depends partly on the price elasticity of demand for the UK goods and services. This is because for instance, the quality of UK goods may encourage foreign and domestic consumers to continue purchasing UK goods. Thus, an increase in the value of the Pound may not be a significant factor limiting the UK’s economic growth.
Furthermore, the UK’s lack of competitiveness being a big factor in limiting economic growth is the decline in productivity relative to other countries. This is because the UK’s productivity, not taking into account the productivity of other international economies, is increased which is likely to lead to UK firms cutting their prices making UK goods more internationally price competitive if foreign firms have not achieved a rise in productivity.
However, since there is a decline in the UK’s productivity because foreign firms have increased their production at a higher percentage with the same amount of labour than the UK, the UK’s relative productivity has fallen, making it less internationally price competitive. Thus, economic growth is limited in the UK as other economies offer lower