The paper looks into the issue of Polish price competitiveness in international markets. Changes in prices and costs as well as the fluctuations in the exchange rate - which all determine a country's international competitiveness - simultaneously affect its trade balance. Thus trends in a country's foreign trade may be at least partially explained with changes in its international competitive position.

One of the most material threats to Polish monetary policy is the substantial deficit on the current account. The mounting external imbalance results from imports having grown relatively faster than exports ever since 1995. This fact illustrates the significance of price competitiveness for the Polish economy in general.

The paper is based on research into trends in the indices of the zloty real effective exchange rate. These indices are based on several commonly used measures relating to various elements of the economy which compete against the rest of the world. The paper also presents the findings of research into exporters' profitability based on the monitoring of their financial standing.

The analysis confirms that changes in the Polish competitiveness are reflected in the performance of the country's foreign trade. Statistical data indicates strong relationships between various measures of competitiveness and the level of foreign trade. The deficit on the current account, which has been deepening since 1995, is to a degree a consequence of negative trends in competitiveness. The nominal appreciation of the zloty, spurred primarily by the influx of foreign capital in the form of both portfolio and direct investment (the former after regulation concerning short-term inward investment had been relaxed) compounded the real appreciation of the zloty resulting from faster growth of domestic price level compared to abroad. Any future changes in the Polish competitiveness, given the new floating exchange rate regime and continued disinflation, will be mainly due to changes in the nominal exchange rate. High inflation differential on the rest of the world will constitute only a minor contribution.

The above observations are reflected, albeit not without discrepancies, on a micro scale, as is proved by the analysis of exporters' financial standing. The trends trickle down to the micro level with a lag, but remain largely similar. Exporters' profitability, a function of the receipt/expense flows, is partially determined by prior unfavourable circumstances. On the other hand, the analysis of the real exchange rate reveals the current price and cost relationships which hint at the future evolution of exporters' position.