Testing the relationship between real effective exchange rate and absolute cost advantage. A dynamic panel GMM analysis from NAFTA

ABSTRACT

This research aims to test the nexus between real effective exchange rates and absolute cost advantage for the North American Free Trade Agreement (NAFTA) between 1995 and 2014. By using the dynamic panel generalized method of moments (GMM), the findings show that the manufacturing sectors’ competitiveness is positively associated with the decrease in unit production costs and negatively related to the increase in the intrasectoral profitability gap.

KEYWORDS:

• NAFTA
• absolute cost advantage
• panel data
• GMM

JEL CLASSIFICATION:

• F10
• F20

Acknowledgments

The author thanks two anonymous referees for their comments and suggestions.

Disclosure statement

No potential conflict of interest was reported by the author.