Abstract We develop a methodology for decomposing countries' observed export product prices into quality versus quality-adjusted-price components. In contrast to the standard approach of equating export price with quality, our methodology accounts for cross-country variation in product prices induced by factors other than quality, e.g. comparative advantage or currency misalignment. Even though variation in quality-adjusted prices is unobserved, it can be inferred from countries' trade balances with the rest of the world. Holding observed export prices constant, for example, countries exhibiting trade surpluses must be offering higher quality (i.e., lower quality-adjusted prices) than countries running trade deficits. We implement the methodology by estimating the evolution of manufacturing product quality among the United States' top 45 trading partners. Preliminary results reveal substantial cross-sectional variation in product quality growth between 1980 and 1997 that is not apparent in export prices alone. China and Ireland, in particular, experience relatively rapid gains in manufacturing quality
