DP5982 Measuring Competitiveness

Author(s): J Peter Neary
Publication Date: December 2006
Keyword(s): competitiveness, economic theory of index numbers, European Monetary Union (EMU), real effective exchange rates (REERs)
JEL(s): C43, F40
Programme Areas: International Macroeconomics, International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=5982

This paper reviews alternative approaches to measuring an economy's cost competitiveness and proposes some new measures inspired by the economic theory of index numbers. The indices provide a theoretical benchmark for estimated real effective exchange rates, but differ from standard measures in that they are based on marginal rather than average sectoral shares in GDP or employment. The use of the new indices is illustrated by some simple calculations which highlight the potential exposure of the Irish economy to fluctuations in the euro-sterling exchange rate.