Competitiveness...

The Competitiveness of an economy and its industries is increased either by cutting costs or by increasing productivity, higher production might help reap the economies of scale by reducing prices and increase demand and sell more and also earn interest income. There are three main things that determine the competitiveness of the domestic economy and the exports and they are the wages, the interest rate and the exchange rate, wages and interest rate are the two main input costs, besides other inputs, that determine the cost and price for the people and thereby competitiveness and demand in the face of peers or competitors to increase market share, domestic and external. Notwithstanding, if we go further we find that it is the real wages, the real interest rate and the real exchange rate which are important because of inflation. A lower inflation would increase them and a higher inflation would lower them, we know that higher inflation would lower demand by reducing the real wages, real interest rate and real exchange rate and a lower inflation would increase demand and growth because consumption and investment spending and exports would increase. However, the supply side weaknesses are often responsible for high inflation, apart from full-employment because supply could not be increased, but innovation, skills and technology may help increase productivity or production at lower cost. According to Solow, any technology is positive if it cut costs and/or lower prices and increase production.  In a nut shell, lower prices increase competitiveness, demand and the economic-growth rate because it also reduces nominal interest rate and demand for higher wages, a lower nominal interest rate would also reduce borrowing cost and increase supply and lower prices. Nonetheless, demand for foreign exchange might become a problem if the economy imports more than what it produces to consume, which might retard domestic investment due to increased foreign competition. And, when foreign competition comes in it makes the real effective wage rate, the real effective interest rate and the real effective exchange rate important from the point of view of competition i.e. the ratio of nominal wages/interest rate/exchange rate of the domestic country and the foreign country divided by the ratio of prices or inflation in the domestic economy and the external economy, when the real effective wages increase and real effective interest rate and real effective exchange rate in the domestic economy go up because of lower inflation and nominal rates at home it increases the competitiveness of the domestic economy vis-a-vis the external economy which increases demand and growth. The higher real effective wages would increase demand for both, the domestic demand and imports and exports would also increase because of higher exchange rate and a lower nominal interest rate could also increase investment demand, all because of lower inflation or prices. Lower prices because of the lower borrowing cost could do much to increase competitiveness, demand and growth, it would also restrict wage demand, and people would consume more and save more and the economy would investment more. Both, Keynes and Milton Friedman have seen lower interest rate as the optimal monetary-policy, but the former had assumed sticky prices and positive nominal interest rate and the latter has viewed prices as flexible and, possibly, zero real interest rate as the right monetary-policy. Keynes assumption about prices as sticky is not evident in the real world as prices or inflation have gone down as a result of expansion in money-supply and lower interest rate, close to Friedman’s optimal monetary-policy, nonetheless he (Keynes) also viewed nominal interest rate to be zero or euthanasia of the renter of capital as a probable outcome of printing money in the long-run.

*In International-Trade paradigm increase in the exchange rate is depreciation and decrease is appreciation.