I. Introduction
With the reduction of international transaction costs, globalization is dominating the
economic discussion more and more in recent times. Markets that were, measured in
economic distance, far apart only a few years ago are moving together and competition
seems to be tightening. A good case in point is the European Union (EU) with its policy
of creating a common market in Europe.
While the traditionally strong economies such as Germany are facing the competition
mentioned above, the EU has also produced an "infant prodigious". With major investment
and subsidies in infrastructure, development, and education, Ireland and its economy
are performing very well, producing 5.1% real economic growth in 2004, compared
to only 1.7% in Germany.
Of course, the question arises as to how Ireland is able to do that. Somehow the Irish
island seems to be more attractive to economic investment and growth than continental
Europe, or in other words, seems to be more competitive.
This paper introduces the most common instruments to measure a country's competitive
position, discusses their shortcomings, and introduces an extended approach. The findings
are then applied to Ireland.
II. Measuring Competitiveness
The traditional measure for many economies to assess competitiveness, also used in the
EU, is the Real Exchange Rate (RER). The RER measures any given price index at
home against its counterpart abroad and expresses the result in common currency terms.
When deciding on a price index, a commonly used index is unit labor costs (ULC) in
the traded-goods sector of a country. The rationale of this index is simple: since traded
products basically share the same market, comparing the underlying (labor) costs ...