Measures of External Competitiveness for Germany


WP/94/113-EA
Measures of External Competitiveness for Germany by Robert A. Feldman

This paper assesses Germany's external competitive position. This
issue is particularly interesting in light of the substantial real
appreciation of the deutsche mark in recent years, as indicated by several
conventional measures of the real exchange rate, and the key role that
exports have played in past economic recoveries.

Competitiveness is assessed from different angles. The paper first
examines movements in several real exchange rate indices for Germany and
reviews briefly their relationship to observed changes in trade flows.
Against this background, the analysis seeks to shed further light on
Germany's competitive position by using the so-called constant market share
approach. Finally, the paper briefly investigates the extent to which
international competition may have narrowed German profit margins in
tradable goods industries and offers a brief assessment of trade prospects
based on recent developments in export order statistics.

The analysis demonstrates the differing picture of Germany's external
competitiveness painted by various indicators. A number of them have shown
a deterioration in competitiveness, some by sizable margins. However, it
also appears likely that Germany's external competitive position is stronger
than suggested by standard measures based on the manufacturing sector alone.
An analysis of broader-based real exchange rate indices supports this
conclusion. Moreover, the results of constant market share analysis suggest
some positive competitiveness effects. These results are particularly
significant for the period up to 1990 insofar as an absolute squeeze on
profits at home was not readily apparent in the available data. They also
suggest the need to take into account product mix, quality factors, and
market orientation in evaluating the international competitiveness of
individual countries.