Management Notes

Reference Notes for Management

Increased foreign competition tend to

Increased foreign competition tend to


a. Intensify inflationary pressure at home
b. Induce falling output per worker-hour for domestic workers
c. Place constraints on the wages of domestic workers
d. Increase profits of domestic import-competing industries

The Correct Answer Is:

c. Place constraints on the wages of domestic workers

Increased foreign competition can have far-reaching effects on a country’s economy. It is crucial to understand these impacts in order to formulate effective economic policies. This analysis will delve into the effects of heightened foreign competition on various economic variables, focusing on wages of domestic workers.

Correct Answer: Explanation:

c. Place constraints on the wages of domestic workers

When foreign competition increases, domestic industries face greater pressure to cut costs and remain competitive. One of the primary ways they achieve this is by minimizing labor expenses, which often translates to constraints on the wages of domestic workers. This is due to a combination of factors:

  • Increased Supply of Labor: With heightened competition, domestic industries may face a surplus of available labor. This abundance of labor can lead to a decrease in wages as employers have a larger pool of workers to choose from.
  • Bargaining Power of Workers: When faced with intense competition, domestic workers may find themselves in a weaker bargaining position. Employers can exert more control over wages, as workers have fewer alternative employment options.
  • Downward Pressure on Prices: To remain competitive in the face of foreign rivals, domestic firms may lower prices. This can lead to tighter profit margins, which in turn puts pressure on businesses to minimize costs, including labor costs.
  • Technological Advancements: Increased competition often spurs innovation and automation in order to enhance productivity. While this may benefit the economy as a whole, it can also lead to wage stagnation or reduction for workers whose roles are partially or fully automated.
  • Global Wage Arbitrage: In a globalized economy, firms may seek to outsource labor-intensive tasks to countries where labor costs are lower. This practice, known as offshoring, can further limit wage growth for domestic workers.

Why Other Answers are Incorrect:

a. Intensify inflationary pressure at home:

When foreign competition increases, firms typically face pressure to cut costs, including labor costs. This tends to have a deflationary effect on prices, as businesses seek to offer products at lower prices to remain competitive. This deflationary pressure counters the idea of intensified inflationary pressure.

Additionally, increased competition tends to encourage efficiency and productivity gains, which can further mitigate inflationary pressures. Overall, while inflationary pressures can be influenced by a multitude of factors, increased foreign competition is generally not one of them.

b. Induce falling output per worker-hour for domestic workers:

Increased competition often incentivizes firms to become more efficient and innovative. They adopt technologies and processes that allow them to produce more with the same or even fewer resources. This leads to an increase in output per worker-hour, rather than a decrease.

While there may be temporary adjustments as firms adapt to increased competition, the long-term trend is towards greater productivity. It’s worth noting that a decline in output per worker-hour would be counterproductive for firms aiming to stay competitive.

d. Increase profits of domestic import-competing industries:

While some domestic industries may see an increase in profits due to heightened competition (through efficiency gains, innovation, etc.), this is not a guaranteed outcome for all industries.

Moreover, this option doesn’t directly address the impact on wages, which is what the question is specifically asking about. Increased profits for industries do not necessarily translate to higher wages for workers. It’s also important to consider that increased competition can lead to price reductions, which can put pressure on profit margins. This is especially true if firms are unable to achieve sufficient cost reductions.

In summary, the correct answer, “c. Place constraints on the wages of domestic workers,” aligns with the typical outcome of increased foreign competition. The other options are less likely outcomes and may not directly address the impact on wages as requested by the question.

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