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PriCe verSuS non-PriCe FaCtorS
Konstantins Benkovskis and Julia WörzIn 2014 all ECB publications feature a motif taken from the €20 banknote.note: This Working Paper should not be reported as representing the views of the European Central Bank (ECB). The views expressed are those of the authors and do not necessarily reflect those of the ECB.
ABSTRACTThe paper proposes a theoretical framework for explaining gains and losses in export market shares by considering both price and non-price determinants. Starting from a demand-side model à la Armington (1969), we relax several restrictive assumptions to evaluate the contribution of unobservable changes in taste and quality, taking into account differences in elasticities of substitution across product markets. Using highly disaggregated trade data from UN Comtrade, our empirical analysis for the major world exporters (G7 and BRIC countries) reveals the dominant role of non-price factors in explaining the competitive gains of BRIC countries and concurrent decline in the G7's share of world exports.
JEL classification
C43, F12, F14, L15Keywords export market share decomposition, non-price competitiveness, real effective exchange rate 2
NON-TECHNICAL SUMMARYExport market shares and the real effective exchange rate (REER) are, perhaps, the two most popular indicators in order to assess a country's competitiveness on a macro level. Both indicators are extensively used in the policy analysis for obvious reasons: The calculation of changes in export market shares is easy and straightforward, while the REER, although being computationally more demanding, can serve as a comprehensive measure of a country's price and cost competitiveness, thus providing some insights about the causes of export performance.However, both indicators are also limited by serious drawbacks: Gains or losses in market shares only describe an outcome, while the driving forces behind underlying changes in competitiveness remain uncovered.The REER, while providing some information with respect to competitiveness, is at the same time limited by its narrowness, as only price factors are taken into account. In practice, the REER cannot fully explain changes in external competitiveness. This becomes especially apparent in the context of emerging countries, where strong export performance often goes hand in hand with an appreciation of the REER, thus suggesting a loss in price competitiveness. The disregard o...
