THE QUALITY AND VARIETY OF EXPORTS FROM NEW EU MEMBER STATES: EVIDENCE FROM VERY DISAGGREGATED DATA 2 / 2010 WORKING PAPER

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1 ISB KOSTATĪS BEŅKOVSKIS RAMUE RIMGAILAITE THE QUALITY AD VARIETY OF EXPORTS FROM EW EU MEMBER STATES: EVIDECE FROM VERY DISAGGREGATED DATA WORKIG PAPER 2 / 200 Th ource o be ndcaed when reroduced. Lavja Banka 200

2 COTETS Abrac 2 Inroducon 3 Theorecal Model 5. Houehold Uly Maxmaon Problem 5.2 Relave Qualy Equaon 6.3 Imor Demand and Suly Equaon 6 2 Emrcal Emae 8 2. Decron of Daabae Proxy for Relave Varey Emrcal Emae of Elacy of Subuon 2.4 Aggregaon of Relave Qualy and Prce 4 3 Reul 6 3. Relave Qualy Level of MS Exor Change n Relave Qualy of MS Exor 7 Concluon 9 Aendce 20 Bblograhy 27 ABBREVIATIOS CES conan elacy of ubuon CIF co nurance and fregh a he morer' boarder CIS Commonwealh of Indeenden Sae EU Euroean Unon GDP gro domec roduc HS Harmoned Commody Decron and Codng Syem HS2 HS wo-dg caegory n..d. normally and ndeendenly drbued MS new Member Sae (Bulgara he Czech Reublc Eona Hungary Lava Lhuana Poland Romana Slovaka and Slovena) SIC Sandard Indural Clafcaon US Uned Sae of Amerca

3 ABSTRACT Accordng o rade heore he average quany of exored good no he only arameer of exor erformance he varey and qualy of exor alo lay an moran role. The goal of h aer o evaluae he varey and qualy of exor from he new EU Member Sae Bulgara he Czech Reublc Eona Hungary Lava Lhuana Poland Romana Slovaka and Slovena (MS) n The analy done on he ba of mehodology rooed by R. C. Feenra (7) and furher develoed by D. Hummel and P. Klenow (3) and Ch. Broda and D. E. Wenen (4). Alhough un value lay an moran role n defnng exor qualy he calculaon heren ake no accoun alo marke hare and he level of monooly ower of frm n a arcular marke. In addon h udy conrbue o he exng leraure by rovdng a dfferen way of evaluang he varey aumng ha he number of exored brand follow he Poon drbuon. The calculaon how ha exor from MS n 2009 were of lower qualy n comaron wh German exor: relave qualy wa rangng beween 0.30 and I wa found ha all MS gnfcanly ncreaed her average number of brand exored o he EU marke; moreover all MS were able o ncreae he average qualy of her exor durng he 0-year reference erod. Fnally relave qualy much more able han relave rce rovdng evdence ha he meaure of relave qualy develoed heren beer han he radonal roxy.e. relave exor rce a doe no nclude relave co of roducon bu reflec rucural facor. Keyword: new EU Member Sae exor qualy varey JEL clafcaon: C43 F2 F4 O52 The vew exreed n h ublcaon are hoe of he auhor emloyee of he Moneary Polcy Dearmen of he Bank of Lava. The auhor aume reonbly for any error and omon. The auhor wan o hank Vkor Ajevk and Uld Rukae (Bank of Lava) for her valuable commen and recommendaon. 2

4 ITRODUCTIO Trade heore ugge ha here are dfferen way by whch a counry can ncreae exor. Model ha follow P. S. Armngon (2) re he nenve margn or exored quany of a ngle roduc. Such model ae ha each counry roduce a ngle varey n each caegory of good o here are no change n varey and no qualy dfference. Conequenly he only way o ncreae exor n uch a heorecal model o ncreae he average exored quany of each roduc whou alerng he e of exored roduc or her qualy. On he oher hand monoolc comeon model lke one develoed by P. R. Krugman (4; 5; 6) aume ha counre roduce an endogenou number of varee and u emha on he role of exenve margn and mananng ha n uch a way exor can be booed by hgher exor varey. In hee model however exor are dfferenaed only horzonally.e. by varou roduc. Th ga flled by model n he ven of H. Flam and E. Helman (0) whch are baed on vercal roduc dfferenaon.e. dfferenaon accordng o qualy. A a reul exor can be ugraded no only by ung nenve or exenve margn bu alo by exorng hgher qualy roduc. Whle he heorecal model of horzonal and vercal dfferenaon n nernaonal rade have a long hory he emrcal alcaon of hee model are no o wderead a nvegang he role of varey and qualy requre dealed rade daa and nenve comuaon. Th aer make an aem o fll he ga and evaluae varey and qualy of exor from MS n Qualy can be defned a any angble or nangble arbue of a good ha ncreae all conumer' valuaon of (2). Hence roduc qualy encomae hycal arbue of a roduc (e.g. ze a e of avalable funcon durably ec) a well a nangble arbue (e.g. roduc mage brand name ec). There le accordance n he defnon of varey n emrcal aer. Theorecally varey commonly defned a a brand roduced by a frm oal ouu of a frm ouu of a counry or ouu whn an ndury of a counry (4). The former wo defnon are cloer o hoe n P. R. Krugman' monoolc comeon model even hough a roblem of daa avalably are; he laer wo are more n accordance wh P. S. Armngon' framework and gnore a large ar of varey. Th aer defne varey a a brand roduced by a frm. For a long me he uual way o ae unoberved exor qualy wa o ue oberved exor rce or un value (value dvded by quany). Even hough h roxy ha a clear advanage of mlcy n calculaon ha alway been argued ha uch a meaure unafacory becaue exor rce may vary for reaon oher han qualy e.g. dfferen roducon co. Que recenly everal emrcal work n he feld of qualy and varey baed on a old mcroeconomc background have aeared. The fr o menon a emnal aer by R. C. Feenra (7) n whch he effec of change n varey on mor rce n he US are uded. Th mehodology wa furher develoed by Ch. Broda and D. E. Wenen (4) and R. C. Feenra and H. L. Kee (8; 9) whle D. Hummel and P. J. Klenow (3) u qualy no focu. Recen aer n h feld worh o be menoned are by J. C. Hallak and P. K. Scho (2) n whch exor rce are decomoed no qualy and qualy-adjued rce comonen and by B. A. Blonngen and 3

5 A. Soderbery (3) ung a dealed marke-baed daa e on he US auomoble marke o ae he gan from ncreang varey. We evaluae he qualy and varey of MS exor on he ba of mehodology rooed by R. C. Feenra (7) and furher develoed by D. Hummel and P. J. Klenow (3) and Ch. Broda and D. E. Wenen (4). Alhough un value ll lay an moran role n defnng exor qualy he calculaon heren ake no accoun alo marke hare and he level of monooly ower of frm n a arcular marke. In addon h udy conrbue o he exng leraure by rovdng a dfferen way of evaluang varey aumng ha he number of exored brand follow he Poon drbuon. For emrcal analy he rade daa avalable from Euroa Comex daabae are ued. A decomoon of nomnal rade flow no rce and volume requred he analy wa done a he mo dealed egh-dg HS clafcaon level conanng more han caegore of good. Alhough focu heren on MS exor ac on EU mor lmng our analy o MS exor o he EU are ued; h however a good rereenaon of exor erformance a he EU he man rade arner of he MS. The aer rucured a follow. Secon derve he heorecal framework of mehodology rovdng ngh no houehold uly maxmaon roblem and mor demand and uly equaon. Secon 2 decrbe he daabae how how he roxy for relave varey wa obaned and how elace of ubuon were emaed. Secon 3 dcue relave qualy rce and qualy-adjued rce of MS exor. Fnal econ conclude. 4

6 THEORETICAL MODEL In h econ he role of qualy and varey of roduc analyed ung a mle heorecal model. In h model conumer' uly deend no only on he hycal volume of conumon bu alo on varey and qualy of good. The model baed on he model rooed and develoed by R. C. Feenra (7) D. Hummel and P. J. Klenow (3) and Ch. Broda and D. E. Wenen (4).. Houehold Uly Maxmaon Problem The radonal way o ecfy how conumer value varey a Dx-Sglz framework where uly gven by CES funcon wh a ngle elacy of ubuon. However a argued by Ch. Broda and D. E. Wenen (4) h creae everal roblem a obvouly elace of ubuon are no he ame for varee of dfferen good and dffcul o nerre he meanng of a ngle elacy. To allow dfferen elacy of ubuon for dfferen caegore of good we follow Ch. Broda and D. E. Wenen (4) and denoe reference of a rereenave agen by a wo-level uly funcon. Conumer buy from u o J counre n each of I obervable caegore of good. In each me erod conumer maxme uly U gven by: I U M [] 2 where M ub-uly derved from conumon of mored good and denoe elacy of ubuon beween mored good. ow followng D. Hummel and P. J. Klenow (3) defned ha ub-uly from an ndvdual good deend no only on he quany of good bu alo on varey and qualy. Moreover n he reen model elacy of ubuon beween varee dffer acro dfferen good: M J j Q j j x j where x j average quany of a ngle brand of good mored from counry j whle Q j average qualy of a ngle brand ( Q j 0 ) j denoe varey or he number of dfferen brand of good mored from counry j and elacy of ubuon beween varee of good. Maxmaon roblem ubjec o he budge conran: [2] I J j j j x j Y [3] In h heorecal framework he conumon of domec roduc alo ncluded no he uly funcon o he e of J counre nclude he domec economy. 2 For mlcy we k he me ubcr for all varable n Secon. and.2. 5

7 where j average rce of good mored from counry j and Y conumer' ncome..2 Relave Qualy Equaon The fr order condon from equaon [] [2] and [3] are he followng: U M Q j x j j [4] where Lagrange muller. We can ranform equaon [4] no log-rao o exre relave qualy n erm of relave rce quane and elacy of ubuon beween varee: Qj j xj ln ln ln [5] Qk k xk where k denoe benchmark counry. I hould be noed ha relave qualy deend only on elacy of ubuon beween varee whle elacy of ubuon beween mored good doe no ener equaon [5]. Equaon [5] how ha relave qualy largely ndcaed by relave rce. If he rce of ecfc good mored from counry j hgher han he rce of he ame good mored from counry k h an ndcaon of a hgher qualy of he former. However relave rce no he only ndcaor of relave qualy. If he elacy of ubuon no hgh he relave conumed quany of a ngle rademark alo an moran facor. In cae he dfferen rademark are no cloe ubue hgher amoun of conumon of one rademark a clear gn of a beer qualy. On he oher hand n a uaon cloe o erfec comeon when dfferen rademark are cloe ubue he only reaon for a hgher rce hgher qualy and relave rce have one-o-one connecon o relave qualy. We can ranform equaon [5] by addng and ubracng relave varee: Qj j j xj j ln ln ln ln [6]. Qk k k xk k The reaon for ranformng equaon for relave qualy no equaon [6] he fac ha he conumed quany of a ngle rademark no an obervable varable whle x j j oal quany of good mored from counry j and oberved from rade ac. ow relave qualy could be derved from relave rce (oberved from rade ac on un value) relave quane of mor (oberved from rade ac on volume) relave varey and elacy of ubuon beween varee of good. The wo laer varable are no drecly obervable. For a momen hould be aumed ha here are daa on relave varey and focu on he dervaon of elacy of ubuon..3 Imor Demand and Suly Equaon To derve elacy of ubuon mor demand and uly equaon need o be ecfed. The demand equaon deermned n erm of marke hare whch j 6

8 denoe he hare of counry j n oal mor of good. By defnng he mnmum co funcon and rearrangng we oban a demand equaon (ee Aendx for echncal deal): ln j ln P ln j ln j Qj j ln J [7] x j j x j j j j j J P j Qj j j where P denoe mnmum co of obanng one un of ervce from mor of good. A P doe no deend on j can be vewed a random effec. Equaon [7] ae ha he marke hare of counry j n oal mor of a arcular good negavely relaed o relave rce of mor from counry j o average rce of good. The hgher elacy of ubuon he ronger he reacon of marke hare o he change n relave rce. Moreover he marke hare ovely relaed o varey and qualy of a roduc. Makng an aumon ha log of qualy a random walk roce ln Q j lnqj ej [8] where e j ochac n..d. roce he followng demand equaon n fr dfference obaned: j j ln [9] j ln j ln ln P j e j where j aear a an error erm n h demand equaon. Followng R. C. Feenra (7) he uly curve for mor from counry j ecfed n fr dfference a ln j ln xj j 0 [0] where nvere uly elacy of good whch aumed o be he ame for all roducng counre whle j random error ha aumed o be ndeenden of j. Th yem of demand equaon [9] and uly equaon [0] wll be ued laer o evaluae elacy of ubuon beween varee. 7

9 2 EMPIRICAL ESTIMATES 2. Decron of Daabae For emrcal analy he rade daa avalable from Euroa Comex daabae ued. A we need o break down nomnal rade flow no rce and volume he analy wa done a he mo dealed egh-dg HS clafcaon level conanng more han caegore of good. Alhough he focu heren on MS exor we ue ac on EU oal mor from MS. Fr our heorecal model conruced from he mor no from he exor de. Second o emae elace of ubuon daa on EU mor from a large amle of counre boh nde and oude he EU needed. Th lm he analy heren o MS exor o he EU whch however a good rereenaon of exor erformance a EU he man rade arner of MS. 3 The daae conan annual daa on EU mor from 50 dfferen counre beween 999 and The l of counre nclude all 27 EU Member Sae everal CIS counre (Rua Ukrane Belaru and Kazakhan) oher moran EU rade arner (e.g. US Jaan Canada Aurala Chna Inda and Brazl). Durng he amle erod EU mor are nonzero n caegore of good. Un value ndce (euro er kg) 5 are ued a roxy for he rce and rade volume (manly n kg) a roxy for quane. Th mean ha all varee of a arcular good are aggregaed whn each counry. The daae ha undergone wo adjumen. Fr n many cae here are daa eher for value or for volume bu no for boh; herefore wa no oble o calculae he un value ndce. Such ncomlee obervaon were gnored and removed from he daabae. The econd adjumen conneced wh rucural change whn he caegore of good. Alhough he mo dealed clafcaon avalable ha been ued ll oble ha omeme ale and orange are comared whn one arcular caegory. One ndcaon of uch a roblem he large rce level dfference. Conequenly all obervaon wh oulyng un value ndce were excluded from he daabae. 6 3 The hare of MS exor o he EU n oal exor reaonably hgh rangng beween 64% and 86% n 2009 (64.3% for Bulgara 84.6% for Czech Reublc 69.5% for Eona 78.8% for Hungary 67.6% for Lava 64.3% for Lhuana 79.3% for Poland 74.3% for Romana 85.8% for Slovaka and 68.9% for Slovena). 4 In he heorecal model wa aumed ha conumer maxme her uly akng no accoun boh foregn and domec roducon. However he emrcal analy face erou conran a daa on domec conumon are no a dealed and daggregaed a for nernaonal rade flow. Therefore here are no daa on domec conumon of ndvdual EU Member Sae e.g. EU mor from Germany are mng he German conumon of domec roduc EU mor from Ialy do no conan Ialan conumon of domec roduc ec. Th daa roblem bae emrcal calculaon heren from he heorecal model and can affec he fnal reul. The oluon of h roblem could be he ubjec for furher reearch. 5 Imor value n he daabae are n CIF rce whch he rce of a good delvered a he froner of he morng counry ncludng any nurance and fregh charge ncurred o ha on. 6 The obervaon wa reaed a an ouler f he abolue dfference of un value ndex wh he mean un value of he caegory exceeded hree andard error. 8

10 2.2 Proxy for Relave Varey Alhough daa decrbng rce and oal quany of a arcular good mored from a arcular counry are avalable any daa abou he varee or number of dfferen brand for one roduc are mng. I oble o fnd uch daa for ome albe a very lmed e of good whch however no enough o make a yemac analy. A wa dcued above he defnon of varey dffer gnfcanly n varou emrcal aer. R. C. Feenra (7) defned he varey of US mor a egh-dg SIC good roduced n a arcular counry acknowledgng ha by h all varee of a arcular good are aggregaed whn each counry whch lead o everal ource of error. R. C. Feenra and H. L. Kee (8; 9) defned he varey of counry' exor o he US a a hare of oal US mor of roduc ha are exored by h counry. Th done ung 0-dg HS clafcaon of US mor. Ch. Broda and D. E. Wenen (4) have oed o ue he ame defnon of varey ndcang a he ame me ha he relance on Krugman' heory mgh ugge he adoon of uch a defnon of varey ha baed on frm-level exor. D. Hummel and P. J. Klenow (3) argue ha no oble o denangle qualy from whncaegory varey unle here are dealed daa on rece number of varey er good from anoher ource. The only emrcal reearch ung uch daa o our knowledge by B. A. Blonngen and A. Soderbery (3). They ue a daa e of auomoble varee for he US marke and conclude ha HS code ofen lumed que dmlar roduc no he ame good clafcaon n uch a way bang elace of ubuon downward. Anoher way of dealng wh he roblem of unoberved varey o lnk o everal obervable macroeconomc varable. A. Denn and B. Sheherd (5) red o exlan dverfcaon of exor o he EU by varou varable and found ha lnked o he nomnal GDP boh ovely and acally gnfcanly whle he dance from he exorng counry enry co and exor co n he counry of orgn affec dverfcaon negavely and acally gnfcanly. Dverfcaon defned a he number of egh-dg roduc lne n a wo-dg ecor for whch a counry ha rcly ove exor o he EU o ll ubjec o he roblem ndcaed above. However here one nereng roery n he mehodology rooed by A. Denn and B. Sheherd ha we can ue: nce he dverfcaon meaure ake he form of coun daa aumed ha follow a Poon drbuon. The number of egh-dg roduc n a wo-dg ecor for whch a counry ha rcly ove exor o he EU oberved. The rao of he number of uch roduc o he oal number of roduc n a wo-dg ecor alone can erve a an ndcaor of average exor varey n h ecor. By h mlcly aumed ha a counry exor eher zero or one brand of each roduc. However he fac ha a counry ha ove exor of a arcular roduc mean ha he number of brand a ove neger whch unoberved. A a reul he number of exor varee wll be underemaed. Th roblem can be olved by aumng ha he number of brand n each wo-dg ecor follow a Poon drbuon. Denong he robably ma funcon of Poon drbuon by f can be argued ha from he rade daa e only f whch he rao of roduc n whch a 0 9

11 counry ha no exor o he oal number of roduc n a wo-dg ecor can be oberved. From h could be ealy roven ha (ee Aendx 2 for more deal): 0 ln f [] where he mean amoun of brand er roduc exored n a wo-dg ecor. Hence aumed ha (ee Aendx 2 for more deal) 0 f I j 0 j [2] f I j f 0 where I j bnary varable whch equal o f counry j exorng good clafed whn ecor and equal o 0 oherwe. Char how he emae for mean relave varey n 2009 ung equaon [] wh Germany a a benchmark counry. The malle amoun of brand among MS comng from Slovena Bulgara Romana and he Balc Sae (45% 50% of German amoun of brand). Slovaka' and Hungary' varey emaed o be around 65% of German varey whle he hghe exor varey n MS found n Poland and he Czech Reublc (around 75%). In addon relave varey alo que heerogeneou acro dfferen roduc caegore (ee Aendx 3). Char Mean relave varey of oal exor o EU n 2009 (comared wh Germany) Source: auhor' calculaon. A regard oher exorer he hghe emaed varey for Germany alhough oher bg EU counre (France he eherland Ialy UK and San) have que mlar amoun of exored brand (90% 95%). Alhough he ze of he US and Chna econome bgger han ha of Germany relave varey emaed o be relavely low (70% 75%) due o much larger dance o he EU marke. A mlar reaon could exlan low varee for Jaan (55%) and Brazl (40%) whle relavely low varey of Rua' exor (40%) could be alo drven by oor bune clmae. 0

12 Overall alhough he obaned rankng of counre lauble he abolue value of relave varee eem o be oo hgh for mall counre lke Slovena Bulgara he Balc Sae ec. Fr could be conneced wh he fac ha he aumon heren abou he number of varee followng Poon drbuon no vald. Second dee he mo dealed avalable clafcaon ued ll oble ha he number of ndvdual roduc n nernaonal rade gnfcanly hgher; hence he uage of egh-dg HS clafcaon overemang relave varey. The dynamc of relave varey durng he la year n MS hown n Char 2. I clear ha all MS ncreaed gnfcanly he average number of brand exored o he EU marke; moreover he mo rad ncreae oberved for 2004 he year of he EU acceon for he mo counre n he analy heren 7. Th how ha negraon no he EU marke goe no only n he nenve bu alo n he exenve dmenon. The reul of growng exor varey alo n lne wh he analy made by M. Funke and R. Ruhwedel () who reored ncreang exor varey for MS n Char 2 Mean relave varey of MS oal exor o EU n (comared wh Germany) Source: auhor' calculaon. The mo gnfcan rogre n exenve margn emaed for Lava whch comared wh German varey ncreaed exor varey from 25% n 999 o almo 50% n A mlar ncreae wa oberved for he oher Balc Sae Bulgara and Romana. 2.3 Emrcal Emae of Elacy of Subuon ow when evaluaon for relave varey obaned we can reurn o he yem of demand ([9]) and uly ([0]) equaon o emae elace of ubuon. Fr he demand equaon [9] ranformed no rao o a reference counry k o elmnae and exreed n he followng way: j j j ln ln ln ~ j [3] k k k 7 Alhough he EU mor no MS exor daa are analyed ll oble ha a ar of he ncreae n varey wa due o mehodologcal change a EU mor nclude alo EU MS mor.

13 ~. j j k Aferward he uly equaon [0] deermned n erm of marke hare and rearranged n he followng form (ee Aendx 4 for echncal deal): j j j ~ ln ln ln j [4] k k k ~ j j k j j 0 ~ where error erm ~ and j are muually ndeenden. j There a yem of wo varable (change n relave marke hare of one brand and change n relave rce) wo equaon and wo coeffcen o emae. The unuual feaure of he yem of equaon [3] and [4] he abence of exogenou varable whch would normally be needed o denfy and emae elace. Followng R. C. Feenra (7) emaon of he yem n he abence of nrumen condered exlong he anel naure of he daa e. To oban he emae here a need o ranform he yem of he wo equaon no a ngle equaon by ~ exlong E. E. Leamer' (7) ngh and ndeendence of error ~ j and j. I done by mullyng boh de of equaon [3] and [4]. Afer uch ranformaon he followng equaon obaned: Y j X j 2 Z j uj [5]. 2 ln ln ln j j j Y j X j k k k ~ ~ ln ln ln j j j j j u j Zj k k k I hould be noed ha he emang of and 2 lead o nconen emae a relave rce and relave marke hare are correlaed wh he error u j and herefore alo X j and Z j are correlaed wh he error. However R. C. Feenra (7) rovde a ranformaon ha allow for conen emaon of and 2 by averagng all varable over all. By dong he followng aymoc condon are me: E X u 0 EZ u 0 j j j j 2 2

14 where uer bar on varable denoe amle mean. Thee condon combned wh he aumon ha he mean of he error ndeenden mly ha he emaor delver conen emae of and 2. R. C. Feenra (7) alo how ha he emae are conen even n he reence of meauremen error n un value rovded ha a conan erm ncluded n he equaon. Therefore a weghed lea quare (WLS) regreon run on he followng equaon: Y j 0 X j 2 Z u [6] j j Afer obanng he emae of he coeffcen n equaon [6] demand and uly elace can be calculaed. If 0 here are wo oluon for one larger and he oher maller han uny. Accordng o gn rercon on he aenon rerced o he oluon ha exceed uny: 2 ˆ ˆ ˆ f 0 hen ˆ 2 2 ˆ ˆ f 0 hen ˆ 2 2 ˆ ˆ ˆ 2 A wa noed by Ch. Broda and D. E. Wenen (4) R. C. Feenra' mehodology end o generae a large number of elace ha ake on magnary value whch are dffcul o nerre. They rooe o deal wh h roblem by conducng a grd earch n cae where 0. Grd earch fnd he mnmum um of weghed lea quare of redual over he value of elace n he ecfed range. We make a grd earch for value of ex0ex20 a 200 nerval and 0 a 00 nerval. Elacy of ubuon beween varee emaed for all where daa on a lea 5 morng counre were avalable. Overall elace for dfferen good were evaluaed. Char 3 how he drbuon of emaed elace. The medan elacy of ubuon beween varee Th accordng o Krugman' model where a frm mark-u equal gve a medan mark-u of 38.5% whch eem o be a lauble reul. Alo Char 3 efe o a very hgh degree of heerogeney n elacy of ubuon for ndvdual roduc. Some marke could be characered a marke wh monoolc comeon whle a gnfcan rooron of marke cloe o erfec comeon. 3

15 Char 3 The drbuon of emaed elace of ubuon beween varee Source: auhor' calculaon. Table The drbuon of emaed elace of ubuon beween varee for eleced wo-dg HS caegore of good Two-dg HS caegory of good umber of obervaon Medan elacy Medan mark-u (%) Pharmaceucal roduc Plac and arcle hereof Rubber and arcle hereof Wood and arcle of wood Paer and aerboard Arcle of aarel and clohng acceore Iron and eel Arcle of ron and eel Mcellaneou arcle of bae meal Machnery and mechancal alance Ralway or ramway locomove Source: auhor' calculaon. The analy of elacy of ubuon beween varee for eleced wo-dg caegore of good how ha alhough here gnfcan heerogeney n elace of ubuon doe no come from beween-caegore dfference a medan elace of everal moran mor caegore are que mlar (ee Table ). Therefore hee reul ugge ha heerogeney moly come from whn-caegore dfference n oher word dfferen roduc marke have dfferen level of comeon even whn he ame caegory of rade. 2.4 Aggregaon of Relave Qualy and Prce The ue of very daggregaed daa creae he roblem for he nerreaon of reul a no oble o decrbe he oucome for everal houand of dfferen roduc. Therefore aggregaon needed. For he aggregaon of relave rce and qualy he Sao-Vara ndex wa ued (ee K. Sao (8) for more deal): 4

16 Pj ln Pjk W ln [7] P I jk I jk k Qj ln Q jk W ln [8] Q k S j I jk j j j x j j x j W Sj Sk ln Sj ln Sk Sj Sk ln Sj ln S I jk k where P jk aggregaed relave exor rce of counre j and k a me erod Q jk aggregaed relave qualy S j denoe co hare whle W wegh of he Sao-Vara ndex. Fnally I jk denoe he e of roduc whch are exored boh by counre j and k. Equaon [7] and [8] could be ued o reor relave rce or qualy n ome arcular erod of me whle canno be ued for he analy of dynamc a doe no ake no accoun rucural change n counry' exor. Therefore a dfferen Sao-Vara ndex hould be ued o calculae change n relave rce: w j ln j wk k I jk I jk ln ln [9] w j jk Sj Sj ln Sj ln S Sj S ln Sj ln S I jk j j j where jk denoe change n relave aggregaed rce and w j wegh. A roblem are for he calculaon of change n relave qualy a here are no daa or emae of abolue qualy of exor from counre j and k. Th roblem ackled by aumng ha qualy of exor from he benchmark counry ( Q k ) alway unchanged hu he change n aggregae relave qualy are calculaed n he followng way: Qj ln q jk wj ln [20] Q I jk k where q denoe change n relave aggregaed qualy. jk 5

17 3 RESULTS Fnally a relave marke hare un value ndce roxy for relave varey and emaed elace of ubuon beween varee have been obaned all ngreden for equaon [6] are avalable and oble o evaluae relave qualy of MS exor. 3. Relave Qualy Level of MS Exor Fr le he focu be on he analy of relave qualy level whch were obaned by aggregang relave qualy for ndvdual roduc ung equaon [8]. Char 4 reor he reul for MS oal exor o he EU n Char 4 Relave qualy of MS oal exor o EU n 2009 (comared wh Germany) Source: auhor' calculaon. Two mmedae concluon could be drawn from hee reul. Fr accordng o auhor' emaon he MS exor comared wh German exor were of lower qualy n 2009: relave qualy wa rangng around beween 0.30 and Second here a gnfcan dfference n oal exor qualy for MS. The Balc counre and Bulgara aear a he low end of he range wh relave qualy of around 30% of German qualy whle he hghe exor qualy wa oberved for Hungary Poland and he Czech Reublc (around 55% of German qualy). Alhough hee reul are already que nformave even more ueful o look a relave qualy for he mo moran exor ecor (ee Aendx 5). The wo abovemenoned concluon are ll vald here. In almo all of he reored ndure exor qualy relavely mall comared wh Germany. Alo he counry rankng reman broadly unchanged. However exor qualy no homogenou acro dfferen ndure whn one counry and he rankng of ndure can gnfcanly vary. For examle he Balc Sae how he be erformance n exor of wood a well a ron and eel; Bulgara Poland and Romana excel n exor of clohng and ralway vehcle whle he Czech Reublc ha he mo qualave exor of mcellaneou arcle of bae meal. I nereng o comare he reul from Char 4 wh wha would be obaned f relave qualy wa roxed ju by relave exor rce or un value. The reul 6

18 for relave rce of MS oal exor o he EU are obaned ung equaon [7] and reored n Char 5. Char 5 Relave rce of MS oal exor o EU n 2009 (comared wh Germany) Source: auhor' calculaon. For all MS relave rce are hgher han relave qualy (dee Char 5 ndcang ha he MS exor rce are ll lower han he German exor rce). Moreover he dfference n relave rce no a ronounced and he counry rankng look dfferen: he lowe rce are n Bulgara Slovaka and Poland whle he hghe n Hungary and Romana. Wha concluon can be drawn from he fac ha relave exor qualy lower han relave rce? From equaon [5] can be ealy een ha ndcae a lower marke hare of one exored MS brand comared wh he hare of one German brand. Th dfference n marke hare larger f he ga beween relave qualy and relave rce more ronounced and ncreang n elacy of ubuon beween varee. 3.2 Change n Relave Qualy of MS Exor Prevou ubecon rovde ueful nformaon abou relave qualy n a arcular year; furher dynamc of relave qualy can be dcued. Change n relave qualy of MS oal exor durng he la 0 year were calculaed ung equaon [20] and are hown n Char 6. 7

19 Char 6 Dynamc of relave qualy of MS oal exor o he EU (comared wh Germany; 999 = ) Source: auhor' calculaon. Alhough he qualy a rucural facor and no execed o be volale Char 6 how ha by ung h arcular mehodology wa moble o exclude har change n he qualy emae n ome year (e.g. a har decreae for Lava Bulgara and Romana n 2006 an ncreae for Romana and Bulgara n 2007 and for Hungary n ). Th could be due o ouler change n clafcaon acal error ec.; hence he reul are nerreed wh ome cauon. Overall wa found ha all MS were able o ncreae he average qualy of her exor durng he amle 0-year erod dee a n he revou ubecon he reence of evdence abou dfference acro counre. The hghe cumulave ncreae n qualy oberved n Romana (50%) wherea n Hungary and he Czech Reublc qualy ncreaed by 35%. The lowe erformance wa howed by Lava (almo no change n he gven 0-year erod whch however o a large exen wa drven by oulyng reul of 2006) and Slovena (0%). I could alo be noed ha a relavely weak ncreae n Balc Sae' exor qualy wa drven by he fall n he econd half of he amle erod. Anoher nereng exerce o comare he dynamc of relave qualy o ha of relave rce and o calculae change n rce adjued by qualy (or "ure rce" a defned by J. C. Hallak and P. K Scho (2)). Qualy moly a rucural characerc of a roduc; herefore relave qualy could be execed o be le volale han he relave rce ndex. Aendx 6 how ha really o: relave qualy much more able han relave rce rovdng evdence ha he meaure of relave qualy heren beer han he radonal roxy of relave exor rce. Smaller volaly of relave qualy could be oberved n he cae of Slovena and Lava. Moreover he advanage of h relave qualy meaure even clearer whle analyng he change n Oberved a gnfcan decreae n relave exor rce n he Czech Reublc and Poland due o nomnal derecaon of he exchange rae whch however no mrrored n relave qualy reman que able dee he economc cr. Th mean ha he emloyed qualy meaure doe no nclude change n relave co of roducon and reflec rucural facor. 8

20 COCLUSIOS The goal of h aer wa o evaluae varey and qualy of MS exor n To acheve he goal mehodology rooed by R. C. Feenra (7) and furher develoed by D. Hummel and P. J. Klenow (3) and Ch. Broda and D. E. Wenen (4) whch ake no accoun no only un value bu alo marke hare and elace of ubuon wa ued. The roxy for unoberved relave varey wa obaned aumng ha he number of brand n each wo-dg ecor follow a Poon drbuon. Accordng o he calculaon heren he malle amoun of brand among MS comng from Slovena Bulgara Romana and he Balc Sae (45% 50% of German amoun of brand) whle he hghe exor varey among MS characerc for Poland and he Czech Reublc (around 75%). All MS ncreaed gnfcanly he average number of brand exored o he EU marke; moreover he mo rad ncreae wa oberved n 2004 he year of he EU acceon for mo counre n h analy. I how ha negraon no he EU marke goe no only n he nenve bu alo n he exenve dmenon. The medan elacy of ubuon beween varee for EU mor emaed o be 3.58 whch gve a medan mark-u of 38.5%. Elacy of ubuon hghly heerogeneou acro ndvdual roduc. The analy of elace n dfferen ecor ugge ha heerogeney moly come from whn-caegore dfference. In oher word dfferen roduc marke have dfferen level of comeon even whn he ame caegory of rade. Calculaon how ha MS exor comared wh German exor were of lower qualy n The Balc Sae and Bulgara aear a he lower end of he range wh relave qualy of around 30% of German qualy whle he hghe exor qualy wa oberved n Hungary Poland and he Czech Reublc (around 55% of German qualy). Exor qualy no homogenou acro dfferen ndure whn one counry eher. For all MS relave rce are hgher han relave qualy. Th mean ha one exored brand from an MS ha a lower marke hare n he common EU marke han he one from Germany. I wa found ha all MS were able o ncreae average qualy of her exor durng he amle 0-year erod alhough here evdence of dfference acro counre. The hghe cumulave ncreae n qualy oberved n Romana (50%) wherea n Hungary and he Czech Reublc qualy ncreaed by 35%. The lowe ncreae wa howed by Lava (almo no change whch however o a large exen wa drven by oulyng reul of 2006) and Slovena (0%). I could alo be noed ha a relavely weak qualy ncreae of he Balc Sae' exor wa drven by he fall n he econd half of he amle erod. Fnally relave qualy much more able han relave rce rovdng evdence ha he develoed meaure of relave qualy beer han he radonal roxy of relave exor rce a doe no nclude relave co of roducon bu reflec rucural facor. 9

21 APPEDICES Aendx Dervaon of mor demand equaon The mnmum co of obanng one un of ervce from mor of good are defned a oal exendure on good (denoed byy ) dvded by ub-uly from he conumon of good. Ung equaon [4] x j can be relaced and he exreon for mnmum co obaned: Y P M J J j j xj j j Qj J j j j j Q [A.]. j j J J Q j j x j j j Q j j j Furher akng no accoun he defnon of marke hare of a counry j n oal mor of good and ung equaon [4] and [A.] he demand funcon n erm of marke hare obaned: x j j j j j j j j J J P x j j j j j Qj j j whch ranform no equaon [7] afer log ranformaon. Q j Q j [A.2] 20

22 Aendx 2 Poon drbuon of varey I aumed ha he number of brand n each wo-dg ecor follow a Poon drbuon: f n e [A2.] n n! where n number of brand of egh-dg roduc n wo-dg ecor a ove real number equal o he execed number of brand of egh-dg roduc n wo-dg ecor. 0 f whch he rao of roduc n whch counry ha no exor o he oal number of roduc n wo-dg ecor oberved. A f 0 hen 0 e 0! 0 e ln f [] whch roduce he average amoun of brand exored n wo-dg ecor. Equaon [] gve he average amoun of brand n he ecor; however h formula for he emae of relave qualy n equaon [6] can be mroved and j o be zero defned f he roduc no exored; lkewe he average amoun of brand n cae he roduc exored can be emaed. The laer calculaed a a weghed average of a rcly ove amoun of brand: 0 f n n f n n 0 f n n n f f n f 0 n 0 f 0 herefore 0 f I j 0 j [2] f I j f 0 where I j a bnary varable whch equal o f counry j exorng good clafed whn ecor and equal o 0 oherwe. 2

23 Aendx 3 Relave varey of MS exor of eleced wo-dg HS caegore of good o he EU n 2009 (comared wh Germany) HS2 caegory of good Bulgara Czech Reublc Eona Hungary Lava Lhuana Poland Romana Slovaka Slovena Pharmaceucal roduc Plac and arcle hereof Rubber and arcle hereof Wood and arcle of wood Paer and aerboard Arcle of aarel and clohng acceore Iron and eel Arcle of ron and eel Mcellaneou arcle of bae meal Machnery and mechancal alance Ralway or ramway locomove Source: auhor' calculaon. 22

24 Aendx 4 Dervaon of equaon [4] The uly curve for mor from counry j ecfed n fr dfference a: ln j ln xj j 0 [0] where nvere uly elacy of good whch aumed o be he ame for all roducng counre whle j a random error. Ung he defnon of marke hare: x j j j j J j x j j j x j j Y j we can rearrange equaon [0] no ln j ln j lny ln j ln j j Ung equaon [9] we oban: ln j Y j j [A4.] and by relacng j one can ealy ge: j ln j Y ln ln whch afer akng rao o a reference counry k ranform no equaon [4]. j. j [A4.2] 23

25 Aendx 5 Relave qualy of MS exor of eleced wo-dg HS caegore of good o he EU n 2009 (comared wh Germany) HS2 caegory of good Bulgara Czech Reublc Eona Hungary Lava Lhuana Poland Romana Slovaka Slovena Pharmaceucal roduc Plac and arcle hereof Rubber and arcle hereof Wood and arcle of wood Paer and aerboard Arcle of aarel and clohng acceore Iron and eel Arcle of ron and eel Mcellaneou arcle of bae meal Machnery and mechancal alance Ralway or ramway locomove Source: auhor' calculaon. 24

26 Aendx 6 Dynamc of relave qualy rce and qualy adjued rce of MS oal exor o he EU n (comared wh Germany; 999 = ) 25

27 Aendx 6 (con). Dynamc of relave qualy rce and qualy adjued rce of MS oal exor o he EU n (comared wh Germany; 999 = ) 26

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