Real Exchange Rates and Competitiveness: A Clarification of Concepts, and Some Measurements for Europe

IMF Working Papers, March 1, 1991

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Canonical URL: Real Exchange Rates and Competitiveness: A Clarification of Concepts, and Some Measurements for Europe

Authors: Leslie Lipschitz, Donogh McDonald
Date: March 1, 1991
The paper examines indicators of competitiveness and analyzes the conceptual foundations of conventional measures of the real exchange rate.
Key finding: Inferences about competitiveness from conventional real exchange rate indicators require strong, and in many cases implausible, assumptions.
Based on the conceptual analysis, the paper proposes alternative measures of competitiveness and illustrates their use with data from Europe.
The paper proposes four simple standardized charts that:
- Help resolve conundrums observed in the European data.
- Provide the basis for a richer set of inferences about competitiveness.

Conventional measures of the real exchange rate are scrutinized for their underlying assumptions.
The authors find that:
- Inferences drawn from these conventional indicators depend on assumptions that are often strong.
- Many of these assumptions are implausible in practical contexts, undermining straightforward interpretation of competitiveness from standard real exchange rate metrics.

The paper proposes alternative measures of competitiveness designed to relax or replace the problematic assumptions inherent in conventional indicators.
Four simple standardized charts are proposed as diagnostic tools to:
- Standardize comparisons across countries and over time.
- Clarify ambiguous signals present in existing European data series.
- Support a broader set of inferences about competitiveness beyond single-indicator readings.

The proposed alternative measures and the four charts are illustrated using data from Europe.
Illustration purpose:
- To show how alternative measures and standardized charts can resolve specific conundrums in the European data.
- To demonstrate how richer inferences about competitiveness can be drawn when using these tools.

Subject: Competition, Economic sectors, Financial markets, Labor, Labor costs, Manufacturing, Production, Productivity
Keywords: average product, capital productivity rise, capital-augmenting productivity improvement, Competition, competitiveness indicator, cost competitiveness, Europe, exchange rate, goods output, Labor costs, Manufacturing, Productivity, productivity development, rate of return, real exchange rate, sector vis-à-vis, traded goods sector, traded-goods sector, WP