Measures of competitiveness in international trade

Quarterly Bulletin 1978 Q2
Published on 01 June 1978

This research article has been prepared mainly by C. A. Enoch of the Bank's Economic Intelligence Department.

Competitiveness may be defined as the advantage in price, speed of delivery, design, etc., which enables a company or country to secure sales at the expense of its competitors. This article concentrates on price-competitiveness, in manufactured goods, between countries. In particular, it discusses which measure of trade-competitiveness can best help to explain changes in the volume of UK exports and imports; this is a topic of considerable interest at present because in recent years the various different measures of UK competitiveness have followed very different paths.

Probably the most common way to measure this country's international competitiveness is to compare the prices of UK exports relative to those of other countries. Other measures are: consumer prices in this country relative to those abroad; various measures of relative unit labour costs; and the ratio of import prices to UK wholesale prices. All the measures show an improvement in UK competitiveness in 1976 when sterling depreciated sharply, and nearly all some deterioration in competitiveness in 1977. This article argues that the appropriateness of each of the various measures depends mainly on the type of market which is involved. It also stresses that all the measures are subject to drawbacks or defects of one kind or another - partly because of the statistical diffIculties involved in compiling them.

It is not possible, on a priori grounds alone, to choose which of the various measures best explains movements in UK trade. The explanatory power of various measures of competitiveness can, however, be tested econometrically, by putting them in equations incorporating the major factors influencing the volume of trade, and seeing how far they improve the explanation of past trends. In the light of such tests, the conclusion of this article is that indices of relative unit labour costs performed best at explaining movements in exports; for imports, there was less difference between the various measures. As in other studies. fairly long lags (up to four years) were found between changes in competitiveness and changes in export volume; for imports, the lags appeared to be much shorter (less than a year).

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