Real Exchange Rates and Productivity Growth in the United States and Japan

38 Pages Posted: 28 Jun 2004

See all articles by Richard C. Marston

Richard C. Marston

University of Pennsylvania - Finance Department; National Bureau of Economic Research (NBER)

Date Written: May 1986

Abstract

Real exchange rates between the yen and dollar based on general price indexes overestimate the competitiveness of the United States relative to Japan. High productivity growth in the traded sector of the Japanese economy results in a continuous fall in the prices of traded goods relative to nontraded goods in Japan. In order to keep U.S. traded goods competitive, the real exchange rate based on general price series like the GDP deflator or the CPI index must continually fall resulting in a real appreciation of the yen.This paper provides estimates of how far real exchange rates based on general price series would have had to fall over the 1973-83 period in order to keep U.S. traded goods competitive. The real exchange rate based on GDP deflators, for example, would have had to fall by 38% relative to the real exchange rate based on unit labor costs in the traded sector. The GDP series remained roughly constant over the period, thus giving the misleading impression that U.S. goods were still competitive despite a sharp rise in the relative price of U.S. traded goods. The paper also provides estimates of the relative wage changes which would have to occur to restore the competitiveness of U.S. traded goods.

Suggested Citation

Marston, Richard C., Real Exchange Rates and Productivity Growth in the United States and Japan (May 1986). NBER Working Paper No. w1922, Available at SSRN: https://ssrn.com/abstract=227087

Richard C. Marston (Contact Author)

University of Pennsylvania - Finance Department ( email )

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National Bureau of Economic Research (NBER)

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