NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Value-Added Exchange Rates

Rudolfs Bems, Robert C. Johnson

NBER Working Paper No. 18498
Issued in October 2012
NBER Program(s):International Finance and Macroeconomics, International Trade and Investment

This paper updates the conceptual foundations for measuring real effective exchange rates (REERs) to allow for vertical specialization in trade. We derive a value-added REER describing how demand for the value added that a country produces changes as the price of its value added changes relative to competitors. We then compute this index for 42 countries from 1970-2009 using trade measured in value added terms and GDP deflators. There are substantial differences between value-added and conventional REERs. For example, China's value-added REER appreciated by 20 percentage points more than the conventional REER from 2000-2009. These differences are driven mainly by the theory-motivated shift in prices used to construct the value-added REER, not changes in bilateral weights.

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Document Object Identifier (DOI): 10.3386/w18498

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