Introduction The Trans-Pacific Partnership is a proposed international agreement that would involve Japan, the United States, and ten other countries of the Asia-Pacific region. The agreement would reduce barriers to international trade and investment and increase competition between Japanese and US industries around the Asia-Pacific region. This would provide an opportunity to improve productivity performance and improve standards of living in all the participating countries. In this chapter we analyze the competition between Japanese and US industries that has provided powerful incentives for mutually beneficial international economic co-operation between Japan and the US across the Pacific since Japan regained sovereignty in 1952. The first objective of this chapter is to present price level indices and productivity gaps between Japan and the US for the period 1955-2012. The price level index is the principal indicator of international competitiveness, often expressed in terms of the over- or undervaluation of currencies, for example, over- or undervaluation of the Japanese yen relative to the US dollar. The productivity gap is an indicator of the relative efficiency with which inputs like capital and labor are transformed into output in the two economies. A key feature of our measures is that they are constructed within the framework of the national accounts of both countries. We begin with a brief discussion of the two basic concepts, the price level index and the productivity gap. The price level index is defined as the ratio of the purchasing power parity (PPP) to the market exchange rate. The purchasing power parity represents the price of a commodity in Japan, expressed in yen, relative to the price in the US, expressed in dollars. By comparing this relative price with the market exchange rate of the yen and the dollar, we obtain the price barrier faced by Japanese producers in competing with their American counterparts in international markets. As a specific illustration, the purchasing power parity of a unit of the gross domestic product (GDP) in Japan and the US in 2005 was 124.9 yen per dollar, while the market exchange rate was 110.2 yen per dollar. The price level index was 1.13, so that the yen was overvalued relative to the dollar by 13%. Firms located in Japan had to overcome a 13% price disadvantage in international markets to compete with US producers.
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