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

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  • Richard C. Marston

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

  • Richard C. Marston, 1986. "Real Exchange Rates and Productivity Growth in the United States and Japan," NBER Working Papers 1922, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:1922
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    References listed on IDEAS

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    1. Richard C. Marston & Stephen J. Turnovsky, 1985. "Imported Materials Prices, Wage Policy, and Macro-economic Stabilization," Canadian Journal of Economics, Canadian Economics Association, vol. 18(2), pages 273-284, May.
    2. Hsieh, David A., 1982. "The determination of the real exchange rate : The productivity approach," Journal of International Economics, Elsevier, vol. 12(3-4), pages 355-362, May.
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    5. Balassa, Bela, 1973. "Just How Misleading are Official Exchange Rate Conversions?: Comment," Economic Journal, Royal Economic Society, vol. 83(332), pages 1258-1267, December.
    6. International Monetary Fund, 1984. "Issues in the Assessment of the Exchange Rates of Industrial Countries," IMF Occasional Papers 1984/004, International Monetary Fund.
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    1. Jacob A. Frenkel & Morris Goldstein, 1991. "Exchange Rate Volatility and Misalignment: Evaluating some Proposals for Reform," Palgrave Macmillan Books, in: Alfred Steinherr & Daniel Weiserbs (ed.), Evolution of the International and Regional Monetary Systems, chapter 8, pages 99-131, Palgrave Macmillan.
    2. Couharde, Cécile & Delatte, Anne-Laure & Grekou, Carl & Mignon, Valérie & Morvillier, Florian, 2020. "Measuring the Balassa-Samuelson effect: A guidance note on the RPROD database," International Economics, Elsevier, vol. 161(C), pages 237-247.
    3. Duo Qin & Xinhua He & Yimeng Liu, 2010. "Exchange Rate Misalignments: Historical Experience of Japan, Germany, Singapore and Taiwan Compared to China Today," Working Papers 667, Queen Mary University of London, School of Economics and Finance.
    4. Frankel, Jeffrey A. & Froot, Kenneth A., 1987. "Short-term and long-term expectations of the yen/dollar exchange rate: Evidence from survey data," Journal of the Japanese and International Economies, Elsevier, vol. 1(3), pages 249-274, September.
    5. Ying Wu & Xin Deng, 2022. "Macroeconomic Impacts of the US External Imbalances with Two Large Emerging Asian Economies: Japan (1970–1990) versus China (2000–2018)," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 64(2), pages 255-279, June.
    6. Xinhua He & Duo Qin & Yimeng Liu, 2012. "Exchange rate misalignments: a comparison of China today against recent historical experiences of Japan, Germany, Singapore and Taiwan," Journal of Chinese Economic and Business Studies, Taylor & Francis Journals, vol. 10(3), pages 247-266, May.
    7. Florian Morvillier, 2020. "Robustness of the Balassa-Samuelson effect: evidence from developing and emerging economies," EconomiX Working Papers 2020-18, University of Paris Nanterre, EconomiX.
    8. Paul Krugman, 1986. "Is the Japan Problem Over?," NBER Working Papers 1962, National Bureau of Economic Research, Inc.
    9. Bonnie Loopesko & Robert A. Johnson, 1988. "Realignment of the Yen-Dollar Exchange Rate: Aspects of the Adjustment Process in Japan," NBER Chapters, in: Misalignment of Exchange Rates: Effects on Trade and Industry, pages 105-148, National Bureau of Economic Research, Inc.
    10. Takao Fujii & Yoichi Matsubayashi, 2016. "The Balassa-Samuelson Effect and the Labor Market in Japan F1977-2008," Discussion Papers 1626, Graduate School of Economics, Kobe University.
    11. Manuel H. Johnson & Bonnie E. Loopesko, 1986. "The yen-dollar relationship: a recent historical perspective," International Finance Discussion Papers 288, Board of Governors of the Federal Reserve System (U.S.).
    12. J. David Richardson, 1988. "Exchange Rates and U.S. Auto Competitiveness," NBER Chapters, in: Misalignment of Exchange Rates: Effects on Trade and Industry, pages 215-240, National Bureau of Economic Research, Inc.
    13. John A. Tatom, 1995. "Currency Appreciation and ‘Deindustrialisation’: A European Perspective," The World Economy, Wiley Blackwell, vol. 18(4), pages 519-541, July.

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