Clark, P., and others, “Exchange Rates and Economic Fundamentals: A Framework for analysis”, IMF Occasional Paper no. 115, 1994.
Edwards, S., “Real and Monetary Determinants of Real Exchange Rate Behavior: Theory and Evidence from Developing Countries”, in Williamson, J., Estimating Equilibrium Exchange Rates (Washington: Institute for International Economics, 1994).
In that respect, changes in unit labor costs may reflect only changes in capital/output ratio that are unrelated to competitiveness.
This groups includes China, Fiji, Guyana, Hong Kong, India, Kenya, Singapore, South Africa, and South Korea.
Higher growth in average labor productivity (measured here by the value-added per employee) in competitor countries like Hong Kong may also reflect an upgrading to higher value-added products.
The export-deflator-based indicator outperforms the other indicators in explaining current account developments. Also contributing is the growth in the trading partner countries; domestic demand indicators appear to be statistically not significant.
The following estimation of a current account equation was made over the 1977/78-1994/95 period:
where CA is the current account balance (excluding imports of aircraft and ships) in million of SDRs, reer_xp is the real effective exchange rate based on export deflators, and gdpr_part is the growth rate of real GDP in partner countries. Domestic demand variables were found not significant.