Prices and Export Performance of Industrial Countries, 1953-63
  • 1 0000000404811396https://isni.org/isni/0000000404811396International Monetary Fund

This paper is a revised version of an interim report presented to a joint session of the American Statistical Association and the American Economic Association at the Annual Meetings of the Allied Social Science Associations in Chicago, December 28, 1964.

Abstract

This paper is a revised version of an interim report presented to a joint session of the American Statistical Association and the American Economic Association at the Annual Meetings of the Allied Social Science Associations in Chicago, December 28, 1964.

The responsiveness of trade flows to relative price changes is an important factor to be considered when deciding upon policy measures aimed at correcting imbalances in international payments. For example, the imposition of temporary charges on imports and the decision to rebate certain indirect taxes on exports in the United Kingdom late in 1964, the devaluation of the Canadian currency in 1962, and the revaluation of the deutsche mark and the Netherlands guilder in 1961 were all policy decisions in which account had to be taken of the effect of price changes on exports and imports.

More generally, for many countries the choice among domestic economic policy measures is influenced by the effects they are thought to have, either directly or through their impact on incomes and price levels, on the external payments position. It becomes important, therefore, to ascertain the nature and magnitude of these effects. But changes in economic activity, shifts in demand, and price movements are to some extent interrelated, and it is exceedingly difficult to assess the separate effect of any one factor.1 However, statistical experiments can be designed in such a way as to minimize the difficulties of separating the effects of price changes from the influences of changes in economic activity on international trade. The present paper is an attempt in that direction.

Despite a number of technical and theoretical limitations, the results indicate fairly clearly that price competitiveness plays an identifiable, though not a dominant, role in the export performance of industrial countries in markets for manufactured products. When cross-section and time-series approaches were combined, export market shares were found to be significantly affected by relative price changes.2 However, the proportion of the observed variation in market shares which is explained by price factors is not very high. The results support the hypothesis that price changes show their full effect only in the course of several years. Price effects were found to be stronger, and price elasticities higher, when changes in prices and exports over 4-year periods were compared than when year-to-year changes were analyzed.

Measurement of Price Competitiveness

The problem

The study is concerned with exports of manufactures by 11 major industrial countries3 to selected market areas over the period 1953–63. The markets are those of the 11 countries themselves and Switzerland.4 In some computations, 5 composite markets are also considered, namely (1) the world market, (2) all major industrial countries, i.e., the 11 exporting countries plus Switzerland, (3) the European Economic Community (EEC),5 (4) the industrial countries excluding the EEC, and (5) the “rest of the world,” i.e., all countries excluding the 11 countries and Switzerland. Exports of manufactures consist of Standard International Trade Classification (SITC) sections 5 (chemicals), 7 (machinery and transport equipment), and 6 plus 8 (basic manufactures and miscellaneous manufactured goods) of the revised United Nations Code.6 Annual data are used.

The principal objective is to identify competitive price effects upon exports of the 11 countries to the various markets. For this purpose, a country's “price competitiveness” is measured in terms of several alternative ratios of one of its own price or cost indices to a weighted average of the corresponding indices of the other exporting countries. Changes in these price or cost ratios are put in relation to the relative export performance of the 11 countries. Demand for foreign manufactured products in each of the markets in the sample is taken as given. The study is not concerned with the manner in which this demand is influenced by economic activity in a particular market, by the prices of imports relative to the prices of domestic import-competing products, or by a number of other factors which affect imports. Attention is focused, instead, upon changes in the distribution of a given total amount of exports to a particular market among competing supplier countries, e.g., upon changes in the competing countries' market shares.7

In order to gauge the influence of price factors on export performance, three sets of statistical estimates were made: (1) elasticities of substitution, in each separate market, of the exports of each supplying country for the exports of all other suppliers of the sample;8 (2) coefficients of responsiveness of export shares of all exporters in all markets to changes in relative prices; and (3) measures of the relation between relative prices and the deviations of actual exports from those which would have occurred if exporting countries had maintained their previous shares in every market.

The extent to which the isolation of price influences can be expected to be successful depends upon the appropriateness of the assumption that influences other than relative prices of exports are not systematically related to changes in these relative prices but exercise their influence on market shares in a random manner. In fact, there is little doubt that this assumption is not fully warranted. One must expect, for instance, that an economy operating at or near full capacity will experience difficulties in increasing its exports in line with the growth of world trade. In a system of perfectly flexible prices, limitations of capacity should be fully reflected in rising export prices. But if prices are not perfectly flexible, their changes may be smaller than those which would clear the market, with the result that order books and delivery periods will be lengthened when over-all demand presses against capacity. If the entire joint effect of somewhat higher prices and a lessened ability or willingness to supply commodities on customary delivery terms is ascribed to the price increases alone, the elasticity of substitution of the country's exports for those of its competitors will tend to be overestimated.

Shifts in the commodity composition of demand in particular markets create a further difficulty. If imports of various commodities are differently affected by changes in economic activity, expansion of demand in a particular market will favor those exporters supplying the commodities for which demand increases the most. An exporting country whose major exports are favored by a shift in the pattern of demand in a certain market will, if anything, be enabled to increase its prices while at the same time it gains a larger share in that market. One would thus find an observation with the “wrong sign.” This difficulty will be the less important, the more uniform are the income elasticities of demand for the goods supplied by competing exporting countries to each market.9 However, the average income elasticity of demand for the exports of one country may be different from that for the exports of all other supplying countries in an individual market if the export bundle of that country differs substantially from the average, or typical, commodity pattern of trade among all industrial countries. As a result, the price sensitivity of its exports may be underestimated or even appear to be “perverse.”

Influence of structural factors

Some indication of the importance of changes in commodity composition and in the geographical distribution of demand is given in Table 1. Changes in exports may be thought of as having occurred because of four main factors: (1) growth in over-all demand, (2) changes in the geographical distribution of demand, i.e., differential growth of import demand in individual markets, (3) changes in the commodity composition of demand, i.e., differential growth in demand for different commodities in each market, and (4) changes in relative prices and other factors.

Table 1.

Selected Industrial Countries: Effect of Geographic and Commodity Composition on the Growth of Exports to Industrial Markets, 1953–55 to 1956–59 and 1956–59 to 1960–631

(In per cent)

article image

Changes in the total value of exports of each country to the other 10 countries and Switzerland (column 1) are compared with changes computed on three alternative assumptions, namely, first, that countries maintained their market shares of the previous period in the industrial market as whole, i.e., in the combined market of the other 10 countries and Switzerland (column 2); second, that they maintained their market shares in the market of each of the industrial countries; and third, that they maintained their market shares in each of three commodity groups in each of the industrial countries. The difference between the changes in the value of exports derived on the second assumption and column 2 is a measure of the effect of changes in geographic distribution of demand on the growth in countries' exports (column 3); that between changes in the value of exports derived under the second and third assumptions is an indication of the effect of changes in commodity composition on the growth of countries' exports (column 4). The three commodity groups are SITC 5 (chemicals), 7 (machinery and transport equipment), and 6 plus 8 (basic manufactures and miscellaneous manufactured products) of the revised United Nations Code. Market shares and percentage changes are computed from averages for three periods (1953–55, 1956–59, and 1960–63).

For most countries, differences between actual export performance (column 1) and that which could have been expected on the basis of over-all growth in demand (column 2) were fairly consistent for the two time periods shown (1953–55 to 1956–59 and 1956–59 to 1960–63). Exports of Belgium, Canada, the United Kingdom, and the United States grew more slowly, and those of France, Germany, Italy, Japan, and Sweden grew faster, than over-all demand in both periods.

Changes in geographical distribution, as shown in column 3 of Table 1, were much more important in explaining export growth in the later period than they had been in the earlier one. For the EEC countries, for example, favorable shifts in the geographical pattern of demand (to a large extent associated with the economic integration of the EEC) explained about one fifth of the changes in their combined exports during the period 1956–59 to 1960–63. For the earlier period, 1953–55 to 1956–59, only a fractional portion—just over one twentieth—of the increase was explained by the geographical factor.

By contrast, the United States, Canada, and Japan, whose principal markets among the countries considered lie outside the EEC, had to overcome a very considerable adverse geographical effect in the later period, because their major markets grew at a slower rate than the industrial market as a whole. Thus Japan's rapid growth in exports is even more remarkable when the geographical factor is taken into account, and the relatively small expansion of U. S. exports appears to have resulted to a large extent from geographical shifts and only to a minor extent from relative price changes and other factors.

In contrast to geographical changes in the pattern of demand, shifts in commodity composition, shown in column 4 of Table 1, affected growth in individual countries' exports to only a moderate extent. During both periods shown, changes in the distribution of demand between the three broad commodity groups adversely affected the exports of Austria, Belgium, Canada, France, and Japan, and in the last period also those of the Netherlands. For these countries, except Canada and—in recent years—Japan, this adverse movement was more than compensated, or at least mitigated, by favorable changes in the geographical distribution of demand. In the later period, in all but one instance, the effects of the geographical factor dominated those resulting from changes in commodity distribution of demand.

Adjustment for changes in commodity composition of demand therefore appears less pressing than elimination of the influence of geographic differences in market growth. For this reason, and also because price data by commodity class are not available, changes in commodity composition were generally left out of account in the estimation of price effects presented in this paper. On the other hand, allowance was made throughout the study for the effect of shifts in the distribution of demand for all manufactured goods among markets.

Price and cost variables

Three alternative price or cost variables were considered: (1) Unit values of exports of manufactures were chosen since constant-weight export price indices are not available for most countries. (2) The manufacturing component of the wholesale price index for the exporting country was taken as an alternative measure of price competitiveness. (3) Wage costs per unit of output in the manufacturing sector were used in order to test the hypothesis that, whereas prices of internationally traded goods must always move in close correspondence, costs (and therefore profits) may diverge and thus provide differential incentives to export or to sell in the home market. All three indicators were adjusted for changes in exchange rates so as to reflect prices or costs in U.S. dollars.

A comparison of movements in these price and cost indices and in the index of productivity per man-hour for 4 major industrial countries is given in Chart 1.10 The relation between changes in the three price or cost indices varied considerably from country to country. For instance, between 1953 and 1963, Germany experienced increases in labor costs far in excess of the rise in wholesale prices, which in turn advanced more than export unit values. A notable divergence of price and cost trends occurred in Japan, where the index of unit labor costs rose by 14 per cent over the 11-year period, while wholesale prices remained roughly constant and export unit values declined by 13 per cent. In the United States, by contrast, unit labor costs increased less between 1953 and 1963 than those of any other industrial country covered by the study, yet the rise in U.S. export unit values exceeded that in any of the other countries.

Chart 1.
Chart 1.

Selected Industrial Countries: Indices (1953 = 100) of Prices, Costs, and Productivity in Manufacturing, 1953–641

Citation: IMF Staff Papers 1965, 002; 10.5089/9781451947212.024.A003

1 From Table 8 (pp. 266–67).

Some of the divergence in movements between the various price indicators may be explained by the fact that in some countries pricing policies for export markets differ from those for the domestic market. Moreover, increases in investment and technological advances may be greater in export industries than in the manufacturing sector in general. Increases in productivity in export industries may therefore be greater than those for all industries, so that increases in unit labor costs or wholesale prices are not necessarily associated with corresponding increases in export prices.11

As a result of the divergent movements in these indices, the size, and indeed the direction, of computed changes in a country's price competitiveness depend upon the choice of the price or cost index on which the measure of price competitiveness is based. Since there appears to be a closer correspondence between shorter-run movements in at least two of the indices (export unit values and wholesale prices) than between their long-run trends, measures of short-run changes in countries' competitive positions, such as deviations from trend, are somewhat less affected by that choice.

Limitations of price and cost data

Proper measurement of price competitiveness would require indices of “delivered” prices by market. Such indices would measure—in addition to changes in basic export prices—changes in transportation and distribution costs and in tariffs. However, no such measure is currently available. The fact that existing price indicators do not reflect discriminatory changes in tariffs has become particularly important in recent years.

Unit value indices, the closest approximation to an export price series generally available, are based on a country's f.o.b. exports to all regions and do not, therefore, take into account differences in prices to ultimate purchasers in different markets. This may be a stronger limitation for the United States, the United Kingdom, and Japan, whose exports are concentrated heavily in nonindustrial areas, than for the other exporters which trade mainly with industrial countries. For these other exporters, the unit value index represents at least an average indicator for the industrial markets, while for the United States, the United Kingdom, and Japan the index reflects to a large extent unit values for goods going to nonindustrial markets, for which commodity composition and pricing policies may differ from those applying to industrial markets.

The usefulness of unit value indices is particularly limited by the fact that they reflect only the prices of goods which are actually exported. If goods cease to be exported, for example because they are overpriced, they will be excluded from the unit value index. Thus a country could “price itself out of world markets,” suffer a loss in market shares, and at the same time appear to have had stable, or even declining, export prices as measured by the unit value index. In these circumstances, a loss of exports would erroneously be ascribed to factors other than price changes.

Wholesale prices are thought to give, at least in this respect, a better indication than do unit values of changes in general price competitiveness of a country, since they measure price changes not only for goods which are actually exported but also for goods which are potential exports. However, in contrast to indices of export unit values, wholesale price indices do not reflect price changes caused by changes in export subsidies and tax rebates. Moreover, they do reflect changes in prices of imported goods. To the extent that these goods re-enter international trade either as component parts or as re-exports, the inclusion of their prices in a measure of export price competitiveness is quite appropriate; but to the extent that they are destined for domestic use, wholesale prices are less useful as indicators of external price competitiveness, particularly for countries where imports account for a large portion of domestic expenditure.12 Nevertheless, since home-produced goods compete, in many instances, directly with imports, movements of their prices cannot for long diverge to any large extent from those of the imported substitutes. Therefore, the inclusion of prices of imported goods does not invalidate the use of wholesale price indices, at least as supporting evidence, in the explanation of changes in export performance resulting from price factors.

A major objection to both wholesale prices and unit labor costs as measures of export price competitiveness relates to differences in coverage between these two series, on the one hand, and the export data, on the other: the manufacturing sector as defined by the Standard International Trade Classification, on which the export series and export unit value indices are based, differs considerably from that defined by the International Standard Industrial Classification published by the United Nations, on which the wholesale price indices and the series underlying the indices of unit labor costs and productivity are generally based.

The measurement of movements of unit labor costs presents technical difficulties because of differences in coverage and method of construction of the basic data series. Remaining inadequacies in the indices that were constructed are, however, likely to be outweighed by other considerations which would tend to make changes in labor costs a questionable explanatory factor of export performance. The relative importance of labor costs in over-all unit costs varies from country to country and over time. For example, European producers often have higher unit costs of raw materials than do U.S. enterprises, giving rise, on this ground alone, to an initial difference in the ratio of labor costs to total costs as well as to greater variation in this ratio over time.13 Thus changes in labor costs do not necessarily indicate changes in total costs.

For reasons given in the preceding paragraphs, none of the three indicators is an ideal measure of price changes for the purpose of this study. Yet each of these indices reflects at least part of the total variation in the price and cost elements which determine a country's price competitiveness. Furthermore, when evidence of price sensitivity can be based on computations using each of the indicators in turn, reservation about the use of any one of them is reduced.

Indices of price competitiveness

To measure changes in the degree of price competitiveness, a country's prices must be brought into relation to the prices of other exporting countries. Three sets of indices of price competitiveness, corresponding to the three price or cost variables used, were constructed for each exporting country. Each set consists of 1 index for each market, obtained by dividing the exporter's price index by the weighted average of the corresponding price indices of the other exporting countries; the weights are their exports of the preceding year (in 1953 U.S. dollars) to the particular market. These indices were computed not only for the 12 single-country markets but also for the 5 composite markets. For each exporter there are thus 16 indices of price competitiveness, 1 index for each of the markets.14 An improvement in competitiveness is indicated by a decrease in a country's index. A particular country's index of price competitiveness varies from market to market in accordance with the shares of its competitors.15 The variations may be quite large. For example, as shown in Table 2, Germany's unit value index rose by 7 per cent between 1953 and 1963, but its index of price competitiveness based on unit values deteriorated (i.e., rose) by more than 11 per cent in the U.S. market and improved (i.e., declined) by almost 8 per cent in the Canadian market. The deterioration in the U.S. market is explained by the fact that Germany's chief competitors there, measured by the volume of their exports to that market, are Canada and Japan, whose unit value indices declined over the period 1953–63. In the Canadian market, on the other hand, Germany faces competition primarily from the United States and the United Kingdom, whose unit value indices rose appreciably more than did that of Germany.

Table 2.

Selected Industrial Countries: Changes in Export Unit Value Indices and in Indices of Price Competitiveness Based on Export Unit Values in Selected Markets, 1953–63 and 1959–63 1

(In per cent)

article image

Export unit value indices are based on data in U.S. dollars. The index of price competitiveness of an exporter in a particular market is defined as the ratio of that exporter's unit value index to the average of the unit value indices of all other exporting countries of the sample, weighted by their export shares in that market.

As may be seen from Table 2 and Chart 2, relative price trends in a number of major countries changed substantially after 1959.16 Most continental European countries improved their relative price positions, in terms of export unit values, fairly steadily between 1953 and 1959, but between 1959 and 1963 their indices of price competitiveness either deteriorated, as in France, Germany, and the Netherlands, or improved at a slower rate, as in Italy. This shift in relative price trends is explained in part by differential trends in prices in individual countries, but also to a large extent by changes in exchange rates (devaluation of the French franc in 1957 and 1958, revaluation of the deutsche mark and the Netherlands guilder in 1961, and depreciation of the Canadian dollar between 1959 and 1962). During the period 1959–63, price stability in the United States led to an improvement in U.S. price competitiveness in some of the markets and to a slowing in its rate of decline in others. These price developments in the United States, which has a large share in many markets, also contributed substantially to the rise (i.e., worsening) of the competitiveness indices of most European countries. Preliminary data for 1964, shown in Table 9 and Chart 2, indicate that this trend continued.

Table 3.

Selected Industrial Countries: Estimated Elasticities of Substitution of Exports of Manufactures to Various markets for Competitors' Exports With Respect to Changes in Indices of Price Competitiveness based on Export Unit values1

article image

This table lists the regression coefficients, ηij, equation (1), Appendix I (p. 261). They represent elasticities of substitution of the exports of countries i (listed in the heading) to markets j (in the stub) for the exports of the other exporting countries of the sample to that market. Coefficients which are significant at the 5 per cent level are shown in boldface type; coefficients which had a positive sign are indicated by a plus sign.

Table 4.

Selected Industrial Countries: Size Distribution of Estimated Elasticities of Substitution by Exporting Country and Market from Annual Data 1953–63

(Number of cases)

article image
Source: Based on data in Table 3.
Table 5.

Selected Industrial Countries: Short-run Price Effects—Regression Equations with Percentage Changes from Preceding year in Market Shares (Dependent Variable) and in Alternative Price or Cost Relatives (Independent Variable)1

article image

Dependent variable: percentage change from preceding year in exporting countries' market shares (A) for all exporters, all markets, and all years, (B) for each exporter in all markets and all years, (C) in each market for all exporters and all years, and (D) in each year for all exporters and all markets. Independent variable: percentage change from preceding year in the ratio of the price or cost index of the exporting country to the average of the corresponding price or cost indices of all exporting countries of the sample weighted by their exports to individual markets. Regression coefficients that are statistically significant at the 5 per cent level are shown in boldface type.

Table 6.

Selected Industrial Countries: Short-Run Price Effects—Regression Equations with Percentage Changes from Preceding year in Market Shares (Dependent Variable) and in Alternative Price or Cost Relatives (Independent Variable)1

article image

The sample period (1953–63) was divided into three subperiods, (1) 1953–55,(2) 1956–59, and (3) 1960–63; for each variable used, percentage changes from the annual average of the first to that of the second, and from that of the second to that of the third, of these subperiods were computed. Dependent variable: percentage change from preceding subperiod in exporting countries' market shares (A) for all exporters, all markets, and both (second and third) subperiods, (B) for each exporter in all markets and both subperiods, (C) in each market for all exporters and both subperiods, and (D) in each subperiod for all exporters and all markets. Independent variable: percentage change from preceding subperiod in the ratio of the price or cost index of the exporting country to the average of the corresponding price or cost indices of all exporting countries of the sample weighted by their exports to individual markets. Regression coefficients that are statistically significant at the 5 per cent level are shown in boldface type.

Table 7.

Selected Industrial Countries: Price Effects on Total Exports of Manufactures—Regression Equations of Deviations of Actual From Constant-Shares Exports on Changes in Alternative Price or Cost Relatives1

article image

The variables in these regression equations are percentage changes (A) of each of the eight years 1956–63 from the annual average of the three preceding years or (B) of the annual average of each of two subperiods, 1956–59 and 1960–63, from the annual average of the preceding subperiod (1953–55 and 1956–59, respectively). Price effects computed with variables under (A) and (B) are referred to as “short-run” price effects and “longer-run” price effects, respectively. In each set of computations, the variables are defined as follows: Dependent variable—change in actual exports of manufactures minus change in exports computed on the assumption that exporters had maintained their previous shares in the market of each of the other industrial countries, expressed as a percentage of previous actual exports. “Previous shares” are those observed on average (A) during the three preceding years or (B) during the preceding subperiod. In the equations labeled “export volume,” the computation relating to the dependent variables uses export data in 1953 prices, and the constant-shares assumption relates to shares of total exports of manufactures in each market. In the equations labeled “total export value,” the same computations are carried out with export data in current prices. In the equations labeled “export value by SITC group,” the computations relating to the dependent variables are also carried out with export data in current prices, but constant-shares exports are derived on the assumption that exporters maintained their previous shares in each of three commodity groups (SITC 5, 7, and 6 plus 8) in each market. Independent variable—Percentage change in the average of each exporter's price relatives in all markets considered, weighted by the exporter's sales of manufactures to these markets.

Table 8.

Selected Industrial Countries: Manufactures−Indices of Prices and Costs in U.S. Dollars, and Index of Productivity, 1953–64

(1953 = 100)

article image
article image
Sources: See Appendix II (pp. 263–65).

Partly estimated.