Measuring quality, willingness to pay and selling capacity at a country-product-destination level using aggregate trade data

Abstract

This paper describes in detail a methodology developed to identify different components of external competitiveness using readily accessible, aggregate trade and macroeconomic data. Building on asymmetric quadratic preferences with heterogeneous consumers, it is shown how to use trade data to identify quality at a country-product level and willingness to pay and selling capacity at a country-product-destination level. These indicators of external competitiveness can be used to complement existing ones based on symmetric preferences with constant elasticity of substitution to refine our understanding of the determinants of a country's external position. An example of the type of analysis that can be performed with these indicators is illustrated focusing on two EU countries following diverging trajectories in terms of external competitiveness in recent years, Latvia and Finland.