Measures of Prices and Price Competitiveness in International Trade in Manufactured Goods

Abstract

Our purpoae in thia paper ia to explain the conatruction of a aet of price indexes relating to international trade in manufactured goods.The indexes are intended to be free of some of the defects of existing measures and more suitable for the calculation of changes in quantities traded and for the analysis of the relations between prices and quantities.Measures of the prices of manufactured goods are a weak link in empirical studies of international trade.While most authors have accepted the existing indexes for primary products as reasonably accurate and representative, quite a few have been skeptical about the data for manufactured goods prices.Their deficiencies affect studies of competitiveness, of real exchange rates, of income elasticities of demand, of price and substitution elasticities, of the terms of trade, and of the supply of exports.*We are indebted to Catherine Mann and 3. David Richardson for many valuable comments and suggestions, and to Ossan Sari, assisted by Nisangul Ceran and Zhang Zhu, for price collection and statistical work on the recent data and to Jases Hayes and Rosa SchUpbach for the preparation of the manuscript.An earlier version of the paper was presented at the Conference on Internmtional Economic Transactions of the NBER Conference on Research in Income and Wealth, in Washington, D.C., Nov. 3 and 4, 19e9.products from different sources meanm that the omission of one country's prices for some manufactured products is much more likely to bias an index than the omission of one country's primsry product prices.An alternative to the unit value indexes is the use of wholesale or producer price indexes.These are collected with a much higher degree of quality control than is applied to the unit value indexes, at least in some countries.However, the prices do not purport to spply to externsl trade.The difference in movmsent between domestic and export prices can be significant, as is pointed out in the sources mentioned above and in Kalter (1978), Krsvis and Lipsey (1977a and 1977b), where these differences are interpreted as reflecting changes in export profit margins, Baldwin (1988), Dornbusch (1987), Krugman (1987), Mann (1986), Msrston (1989), and Ohno (1989). 2 The producer price indexes share the characteristic of the unit value indexes that they are computed with different weighting, coverage, and index number formulas in different countries.For both types of indexes, the fact thst the methods of coaputstion differ greatly from one country to another stems from the fact that they are computed by national statistical agencies for their own purposes, for which they may be quite satisfactory.A further consequence of the dependence on price collection by individual countries is that it builds in an assumption about price behavior.The assumption is that prices of goods not covered by a country's price collection process move identically with prices of covered commodities in the saae general class or, if the whole class is uncovered, with the prices of commodities in general.It is implicitly assumed that price movements of the same product in other countries convey no information at all about the likely change in the missing prices.That is en odd choice of assumptions for a

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