Competitiveness and government expenditure: The Australian example

This paper proposes a new measure of competitiveness based on the ratio of non-tradable goods and services prices to tradable goods and services prices. It first presents a straightforward framework for understanding how key macroeconomic variables determine this alternative competitiveness measure with reference to output and expenditure behaviour in a two sector open economy. It then econometrically examines its most significant determinants with reference to private and public sector consumption and investment in Australia. Results based on quarterly data from 1998 to 2013 suggest that government expenditure on non-tradable goods and services was the most significant factor to worsen Australia's competitiveness. This provides an alternative perspective on the efficacy of fiscal policy to those previously advanced in standard international macroeconomic models.