MEASURING COMPETITIVENESS

J. Peter Neary

Abstract

This paper reviews alternative approaches to measuring an economy's cost competitiveness and proposes some new measures derived from 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 on average sectoral shares in GDP, employment or exports. The use of the new indices is illustrated by some simple calculations which highlight the potential exposure of Irish manufacturing to fluctuations in the euro-sterling exchange rate.

JEL Codes: F40, C43.

Keywords: Competitiveness, Economic theory of index numbers, Real effective exchange rates (REERs).

Prepared for the conference Macroeconomic Perspectives in honour of Brendan M. Walsh to be held at University College Dublin, 7 October 2005.

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