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

_IMF Working Papers, March 1, 1991_

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## Bibliographic details
- Authors: Leslie Lipschitz, Donogh McDonald
- Published: March 1, 1991
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451844184.001

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### Summary and main findings
- 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.

### Conceptual analysis of conventional measures
- 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.

### Proposed alternative measures and diagnostic tools
- 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.

### Application to European data
- 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 coverage and keywords (as provided)
- 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

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/30/real-exchange-rates-and-competitiveness-a-clarification-of-concepts-and-some-measurements-for-902_