Explain how a fall in a country’s international competitiveness may affect economic growth in the economy

AQA AS-Level Paper 2 June 2023 Insert

Extract F (lines 1–2) states: ‘Many economists believe that the trade balance reflects the strength or weakness of a country’s international competitiveness’. Explain how a fall in a country’s international competitiveness may affect economic growth in the economy. (10 marks)

Competitiveness refers to a country's ability to sell its exports to the rest of the world.

Firstly, a fall in competitiveness would lead to a fall in the value of a country's exports. Exports being a component of aggregate demand (AD) means that AD would decrease in the economy. As a result, real gdp would fall from y1 to y2 since less goods and services are being produced in the economy. This means that economic growth would slow down. Additionally, with weaker demand for goods and services, there will be a fall in the derived demand for labour. As people lose their jobs and incomes fall, consumer spending is likely to decline further. This causes a further fall in AD, known as the negative multiplier effect, leading to even slower economic growth. This is shown by the fall in real gdp from y1 to y3 in the diagram below. If economic growth continues to fall for two or more consecutive quarters, this could lead to a recession.

Another issue with poor competitiveness, for example in the UK, is that it suggests that goods and services are of a high cost and therefore a high price, or a low quality. This means that imports are also likely to increase, which is another reason suggesting that both aggregate demand and economic growth would fall in the economy.

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