Are unit export values correct measures of the exports' quality?

It has become common to measure the quality of exports using their unit export value (UEV). Applications of this method include studies of intra-industry trade (IIT) and analyses of industrial 'competitiveness.' This literature seems to assume that export quality and export price (the most natural interpretation of UEV) are not merely correlated but that they follow each other one-for-one. We put this assumption under scrutiny from both a theoretical and empirical point of view. In terms of theory, we formalize this assumption as a hypothesis of the proportionality of equilibrium prices and equilibrium qualities. We discuss several cases for which this hypothesis is theoretically doubtful (nonlinear utility and cost functions; strong and asymmetric horizontal product differentiation). We also suggest a method of verifying the hypothesis for cases in which it cannot be easily rejected theoretically. This method is then applied to German imports in the period of 1994-2009. We find that the implications of the proportionality hypothesis are largely contradicted by the data.

► We put the method of measuring the export's quality by its unit value under scrutiny. ► The method implies a proportionality of equilibrium prices and qualities. ► This 'proportionality hypothesis' is theoretically doubtful for many demand functions. ► Empirically, it would imply the continuity of the conditional distribution E(Q|P). ► Yet the distribution is discontinuous for a majority of German imports in 1994-2009.