{"id":27709,"title":"International Competitiveness and Terms of Trade","link":"https:\/\/bst-europe.eu\/de\/globalization\/international-competitiveness-and-terms-of-trade\/","date":"22. Januar 2021","date_unix":1611323419,"date_modified_unix":1654715516,"date_iso":"2021-01-22T13:50:19+00:00","content":"

The international competitiveness of an economy is a central goal of economic policy. But how can this competitiveness be measured? One important indicator is the „Terms of Trade.“ (TOT<\/a>)<\/p>\n

#1 The concept of international competitiveness<\/strong><\/h2>\n

In the study of economics, there is no consensus on what is meant by „international competitiveness.“ One of the best-known definitions comes from Bela Balassa, who describes competitiveness<\/a> as the „ability to sell<\/strong>.“<\/p>\n

However, the ability to sell one’s products in the market does not fully describe competitiveness. If a company lowers its prices far enough, it can always sell its products. However, it will not earn any profit and may even suffer losses. Competitiveness, therefore, also includes the „ability to earn<\/strong>.“<\/p>\n

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#2 What is the goal of international competitiveness?<\/strong><\/h2>\n

One goal of high competitiveness is to increase the volume of goods and services available to the economy for consumption and investment purposes. However, this goal should not be pursued „at any price.“<\/p>\n

If a country pursues the goal of inclusive<\/strong> and ecologically sustainable economic growth<\/strong>, low labor costs, low environmental costs, etc., these, unfortunately, are not appropriate instruments for increasing competitiveness.<\/p>\n

However, the aim can be to offer high-quality products that meet high demand on the world market. Increased demand leads to rising prices. Then, by selling one’s own products to the rest of the world, the quantity of imported goods exchanged for them becomes greater over time. „Terms of Trade can express this real exchange ratio.<\/p>\n

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#3 International Competitiveness and Terms of Trade<\/strong><\/h2>\n

The Terms of Trade<\/a> indicate how many units of an import good (or units of a bundle of import goods) the country receives for one unit of its export good (or one unit of a bundle of export goods).<\/p>\n

An improvement in the Terms of Trade<\/strong> means that the country can sell its products on the world market, receiving more import good units for one unit of its export good. Domestic products are thus deemed so attractive – and thus competitive – by consumers abroad that they are willing to pay an increasing price.<\/p>\n

Therefore, an economy can be considered internationally competitive if it succeeds in selling its products on the world market without the Terms of Trade deteriorating. And when the Terms of Trade improve, the competitiveness of the economy increases.<\/p>\n

The level of a country’s Terms of Trade depends essentially on two prices:<\/p>\n