Authors: Ball, V. Eldon, J.-P. Butault, C. San Juan and R. Mora.
The Doha Round of trade negotiations has stagna ted, with the European Union and the United States at an impasse over the level of support for agriculture and the need for increased market access. These disputes over trade issues have accompanied the rapid expansion of European exports to the United States.1 Explanations for the resulting trade imbalance must include variations in exchange rates, changes in the relative prices of factors of production, and the relative growth of productivity.2 We analyze the role of each of these factors in explaining the rise in competitiveness of European Union agriculture relative to its United States counterpart.
At the outset it is necessary to define a measure of international competitiveness. Our measure of international competitiveness is the price of agricultural output in a given country relative to the price in the United States. We calculate relative output prices for eleven member countries of the European Union. In order to explain changes in international competitiveness, we must account for changes in the determinants of this relative price.
The starting point for our analysis of the competitiveness of European Union and United States agriculture is the exchange rate between each national currency and the dollar. Variations in exchange rates are easy to document and are often used to characterize movements in relative prices among countries. However, movements in these relative prices of goods and services do not coincide with variations in exchange rates. To account for changes in international competitiveness a measure of the relative prices of specific goods and services is required.
Relative prices among countries can be summarized by means of purchasing power parities. The purchasing power parity for an industry’s output is the number of units of a given currency required to purchase an amount of the industry’s output that would cost one dollar in the United States. The dimensions of the purchasing power parities are the same as the exchange
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