Measuring quality and non-cost competitiveness at a country-product level

This paper contributes to the ongoing debate on macroeconomic imbalances and external competitiveness by developing a set of indicators of export capability at a country-product level which can be used to complement the existing toolkit of instruments based mostly on unit labour costs and relative price levels. A micro-founded methodology is here proposed to extract information on the capacity of a country's exporters to compete abroad by combining trade and macroeconomic data. In particular, light is shed on two independent components of demand for a particular variety (country-product combination): markups-shifting "quality" and sales-boosting "non-cost competitiveness". Together with cost efficiency and information on foreign prices and consumption, these additional indicators may foster our understanding of the determinants of a country's external position, thus providing better guidance for policymaking.