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Purchasing Power Parities for Tradables, Exchange Rates and Price Competitiveness

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  • Stephan Schulmeister
Abstract
The dollar/euro PPP for tradables in 2002 is estimated at 0.93, hence the exchange rate (0.94) differed very little from PPP; in 2004, however, the dollar/euro exchange rate (1.24) was by roughly 25 percent overvalued relative to PPP for tradables (0.98). Deviations of the exchange rate from PPP for tradables are smaller than deviations from PPP for GDP; hence, the law of one price holds comparatively better for internationally traded goods and services than for non-tradables. There exists a strong inverse relationship between the price level of tradables relative to GDP and real GDP per head: The more advanced an economy is the cheaper are tradables relative to non-traded services (Balassa-Samuelson effect). The structure of relative prices of tradables is more similar across countries as compared to the price structure of all goods and services. The long-run mean of the nominal exchange rate deviates much less from the mean of PPP for tradables as compared to PPP for GDP. The relationship between relative export price levels based on tradables PPPs and export market shares is clearly inverse for most countries, e.g., if exports of the Euro area become 10 percent more expensive relative to US exports, then 1.54 percentage points of export market shares are expected to shift from the Euro area to the USA.

Suggested Citation

  • Stephan Schulmeister, 2005. "Purchasing Power Parities for Tradables, Exchange Rates and Price Competitiveness," WIFO Studies, WIFO, number 25656, March.
    • Handle: RePEc:wfo:wstudy:25656
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    Cited by:

    1. Stephan Schulmeister, 2006. "Weltwirtschaft wächst rascher – hohe Unsicherheit über Erdölpreis und Wechselkurse. Mittelfristige Prognose der Weltwirtschaft bis 2010," WIFO Monatsberichte (monthly reports), WIFO, vol. 79(5), pages 359-373, May.
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    3. Lukas Menkhoff & Stephan Schulmeister & Bernd Kempa & Norbert Walter, 2009. "Internationales Währungssystem: Ist der US-Dollar als Leitwährung überholt?," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 62(16), pages 03-18, August.
    4. Stephan Schulmeister, 2009. "Technical Trading and Trends in the Dollar-Euro Exchange Rate," WIFO Studies, WIFO, number 37582, March.
    5. Stephan Schulmeister, 2007. "Weltwirtschaftswachstum beschleunigt sich, Leistungsbilanzungleichgewichte bleiben hoch. Mittelfristige Prognose der Weltwirtschaft bis 2011," WIFO Monatsberichte (monthly reports), WIFO, vol. 80(2), pages 109-120, February.
    6. Stephan Schulmeister, 2008. "Belebung des Wirtschaftswachstums nach Schwächephase. Mittelfristige Prognose der Weltwirtschaft bis 2012," WIFO Monatsberichte (monthly reports), WIFO, vol. 81(5), pages 353-364, May.
    7. Stephan Schulmeister & Margit Schratzenstaller-Altzinger & Oliver Picek, 2008. "A General Financial Transaction Tax. Motives, Revenues, Feasibility and Effects," WIFO Studies, WIFO, number 31819.

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