Journal Article

No. 2016-30 | November 22, 2016
The Effects of Competitiveness on Trade Balance: The Case of Southern Europe PDF Icon
(Published in Special Issue Recent Developments in Applied Economics)

Abstract

According to conventional wisdom, “peripheral” Southern European members of the euro area (Greece, Italy, Portugal and Spain) suffer from a problem of competitiveness. Since their membership of the euro area renders devaluation impossible, adjustment should come through decreasing wages and prices in these countries, which, by improving the trade balance, should lead to a recovery of previous levels of employment and growth. In this paper, the authors estimate trade balance equations for the Southern European countries, both for total trade and for the trade performed with the European Union, taking three alternative measures of the real exchange rate, based on consumption price indices, export prices and unit labour costs, respectively. Their main conclusion is that demand seems to be more relevant than relative prices when explaining the evolution of the trade balance.

JEL Classification

F31 F41 F45

Citation

Oscar Bajo-Rubio, Burcu Berke, and Vicente Esteve (2016). The Effects of Competitiveness on Trade Balance: The Case of Southern Europe. Economics: The Open-Access, Open-Assessment E-Journal, 10 (2016-30): 1—26. http://dx.doi.org/10.5018/economics-ejournal.ja.2016-30

Assessment

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