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Effective exchange rates
A broad interpretation of international competitiveness would involve comparison of the success of different countries in raising productivity, fostering innovation and improving living standards. The two competitiveness indicators shown here have a narrower objective – namely to measure changes in a country’s price competitiveness in international markets based on changes in that country’s exchange rate and price level (either consumer goods prices or unit labour costs in manufacturing) relative to those of its competitors. In addition, we present indices of nominal effective exchange rates. This indicator reflects only variations in market exchange rates, which is just one of the factors that enter the calculation of the two competitiveness indicators mentioned above.
Definition
The nominal effective exchange rate indices are calculated by comparing, for each country, the change in its own exchange rate against the US dollar to a weighted average of changes in its competitors’ exchange rates (also against the US dollar), using the weighting matrix for the current year (based on the importance of bilateral trade).
The other two indicators, relative consumer price indices and relative unit labour costs in manufacturing, can be described as indices of real effective exchange rates. Unlike nominal effective exchange rates, they take into account not only changes in market exchange rates, but also variations in relative price levels (using, respectively, consumer prices and unit labour costs in manufacturing), and therefore can be used as indicators of competitiveness. The change in a country’s index of relative consumer prices between two years is obtained by comparing the change in the country’s consumer price index (converted into US dollars at market exchange rates) to a weighted average of changes in its competitors’ consumer price indices (also expressed in US dollars), using the weighting matrix for the current year (based on the importance of bilateral trade). Changes in the index of relative unit labour costs in manufacturing are calculated in the same way.
Comparability
All three indices shown here are constructed using a common procedure.
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Long-term trends A rise in the indices represents a deterioration in that country’s competitiveness. Note that the indices only show changes in the international competitiveness of each country over time and that differences between countries in the levels of the indices have no significance. All three indices are rather variable from year to year, so that it is difficult to detect long-term movements. Between 2000 and 2005, Japan, Sweden and the United States have generally improved their international competitiveness as judged by both relative consumer price indices and unit labour costs in manufacturing, while the competitive positions of Australia, Canada, Hungary and New Zealand have generally deteriorated. For both groups of countries, these changes reflected in large part movements in these countries’ nominal effective exchange rates. By contrast, in the case of the United States, the improvement in competitiveness in terms of unit labour costs since 2000 has been significantly larger than the change in their nominal effective exchange rate, and therefore must have been due to favourable developments in unit labour costs in manufacturing, which in turn reflected trends in productivity and wage costs. |
Source
- OECD (2007), OECD Economic Outlook: December No. 80 – Volume 2006 Issue 2, OECD, Paris.
Further information
Statistical publications
- OECD (2006), Main Economic Indicators, OECD, Paris.
Methodological publications
- Durand, M., C. Madaschi and F. Terribile (1998), Trends in OECD Countries’ International Competitiveness, OECD Economics Department Working Papers, No. 195, OECD, Paris.
- Durand, M., J. Simon and C. Webb (1992), OECD’s Indicators of International Trade and Competitiveness, OECD Economics Department Working Papers, No. 120, OECD, Paris.
Online databases
Websites
- OECD Economic Outlook – Sources and Methods, www.oecd.org/eco/sources-and-methods.
| Texts | |
| • | Indicator web page |
| • | Indicator in PDF |
| Tables (xls) | |
| • | Nominal effective exchange rates |
| • | Relative consumer price indices |
| • | Relative unit labour costs in manufacturing |
| Graphics | |
| • | Nominal effective exchange rates |
| • | Relative consumer price indices |
| • | Relative unit labour costs in manufacturing |
Nominal effective exchange rates
Relative consumer price indices
Relative unit labour costs in manufacturing
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