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October 1994, Vol. 117, No. 10
Manufacturing costs, productivity, and competitiveness, 1979-93
Edwin R. Dean and Mark K. Sherwood
Barriers to world trade are diminishing, and in many countries, exports account for increasing proportions of gross domestic product. As a result, business men and women, labor leaders, and policymakers have become more concerned with the competitiveness of their countries' exports. While there are several variables that can be used to gauge an industry's or a sector's competitiveness, the most obvious may be the price of the industry's or sector's product. To be sure, other factors influence competitiveness, including the quality of the product, the timeliness of its delivery, after-sales service, and the flexibility needed to respond to changes in customers' requirements. Still, price is a leading candidate, particularly because measures of price frequently take changes in the quality of the product into account. This article proceeds on the assumption that, other things being equal, price changes are a useful indicator of changes in an industry's competitiveness. This assumption is supported by a number of studies indicating that the volume of exports tends to rise when export prices fall.1
Given, then, that price is a gauge of competitiveness, it is of interest to illuminate factors underlying a country's ability to hold down relative price increases for its products and thereby achieve stronger performance in trade. Such factors are important because they can have policy implications. Further, an examination of these underlying factors as gauges of competitiveness is useful in those cases where measures of output price trends are not readily available or are not accurate.
The costs of the inputs used by the country's industries and sectors to produce a unit of output contribute to the price of its product as well and consequently are also an important indicator of competitiveness. Assuming that exchange rates are constant, if one country's input costs for a product are increasing less than another's, we would expect the first country's trade situation to be improving relative to that of the second.
Unit input costs equal the amount of an input used to make a unit of the product times the price of the input. Consequently, changes in costs can be brought about by changes in the price of the input. Costs can also change through productivity growth, which reflects changes in production that occur without a corresponding change in inputs.
This article examines the relationship that exists among productivity, costs, and prices, illustrating it with data produced by the Bureau of Labor Statistics. The first half of the article studies the relationship using the traditional measures of unit labor costs, labor compensation per hour, and labor productivity. The second half examines the more general concepts of unit total costs, output prices, prices of all inputs, and multifactor productivity and relates these concepts to competitiveness.
This excerpt is from an article published in the October 1994 issue of the Monthly Labor Review. The full text of the article is available in Adobe Acrobat's Portable Document Format (PDF). See How to view a PDF file for more information.
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1 See, for example, the studies cited in Federal Reserve Bulletin, May 1994, p. 367.
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