MEASUREMENT OF INTERNATIONAL COMPETITIVENESS : EXPERIENCE FROM ASIA

Abstract

This thesis investigates the price competitiveness of five Asian countries Singapore, Malaysia, Japan, Thailand and Korea. We use a new measure of the real exchange rate for this purpose. The new measure, which we call the 'basket' approach, involves defining all exchange rates and prices on an appropriately weighted 'basket' of currencies instead of a single currency. The currencies of all the countries under study are included in the 'basket' and their average export shares are used as weights. The rates calculated using this new method arc then compared with those using the conventional purchasing power parity (PPP) approach. The results reveal that the two measures of real exchange rates diverge largely in most cases. Under the basket approach, we find that on average, all the countries experience real depreciation of their currencies during the period under study. Interestingly, under the PPP approach, all countries except Malaysia encounter a real appreciation of their currencies. Furthermore, the quarterly swings in the real exchange rates for all these countries tend to be larger in the case of the basket measure than under PPP. This suggests that the PPP based real exchange rates tend to understate the measure of competitiveness for these countries. The results of this study are very instructive and seem to provide evidence to the widely-held notion that the currencies of these Newly Industrialising Economics (NIEs) are overvalued. The results may also have useful implications in terms of the well-known Balassa hypothesis.