Explore the connection between the economic indicators and real-world issues. These lessons typically can be done in one class period.
Current Key Economic Indicatorsas of May 5, 2013
On a seasonally adjusted basis, the Consumer Price Index for All Urban Consumers decreased 0.2 percent in March after increasing 0.7 percent in February. The index for all items less food and energy rose 0.1 percent in March after rising 0.2 percent in February.
Total nonfarm payroll employment rose by 165,000 in April, and the unemployment rate was little changed at 7.5 percent. Employment increased in professional and business services, food services and drinking places, retail trade, and health care.
Real gross domestic product increased at an annual rate of 2.5 percent in the first quarter of 2013 (that is, from the fourth quarter to the first quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the fourth quarter, real GDP increased 0.4 percent.
To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent...
The U.S. international trade deficit in goods and services decreased by $2.0 billion to $35.1 billion in October from a revised $37.1 billion in September as exports decreased (-$0.8 billion) and imports decreased as well (-$2.9 billion).
Notes to Teachers
[Paragraphs that appear in italics are included only in the teacher’s version and are excluded from the student version. The discussions, student questions, and activities in the case studies early in the semester are at basic levels and will gradually increase in complexity later in the semester.
You may wish to use the following larger versions of the graphs and tables from this lesson for overhead projection or handouts in class:
Goals of the International Trade Case Study
The purpose of the international trade case study is to provide the most recent data on international trade, interpretations of trends and causes of changes in trade deficits and surpluses, and a number of relevant student and classroom activities.
Definition of Balance of Trade
A country’s balance of trade (or net exports) is the value of its exports minus its imports. If the result is positive, that is, exports are greater than imports, we describe it as a surplus in the balance of trade. A trade deficit, or a deficit in the balance of trade, occurs when imports are greater than exports.
Net exports are equal to exports minus imports. Net exports are positive if exports exceed imports and are negative if imports exceed exports.
October exports were $82.0 billion and imports were $117.0 billion, leading to an overall trade deficit of $35.1 billion. Exports of goods decreased by $1.2 billion and exports of services increased by $0.3 billion. Imports of goods decreased by $3.1 billion and services increased by $0.1 billion.
The trade deficit (exports minus imports) increased rapidly from March 1998 to September of 2000. From September 2000 to March 2001, the monthly trade deficit remained relatively stable around $33 billion. Between March and September, imports fell more rapidly than exports, causing the trade deficit to decrease from $33 billion to $28.4 billion. Following the events of September 11, both imports and exports of goods and services decreased dramatically. (For more information on the impact of September 11 tragedy on international trade, see the September and October case studies from 2001.)
After September 2001, the levels of exports and imports more closely approximated the previous levels and the trade deficit returned to the $28 billion to $31 billion range. Imports increased as the economy began to recover from the recession and as oil prices increased. Exports increased in tandem, but were not sufficient to offset the increase in imports. As oil prices continued to increase and the economy continued to recover, the trade deficit has moved higher, reflected in approximately $35 billion deficits of April through October. The monthly trade deficit reached a peak of $38.1 billion in August.. As seen in the latest CPI case, gasoline prices have increased 29 percent so far this year and continue to rise.
Exports and imports in dollar terms have been increasing for the last 30 years. Exports and imports as percentages of GDP have been increasing throughout most of those years. As percentages of GDP, exports and imports rose rapidly in the 1970s, were steady in the 1980s, and began to rise again in the 1990s. The trade deficit, as a percentage of GDP, increased dramatically in the 1980s, shrank in the late 1980s and early 1990s, then began to rise again in the late 1990s. Over the last several years, imports have continued to rise as a percentage of GDP and exports have fallen.
Exports are currently 9.8 percent of GDP; imports are 13.9 percent; and the trade deficit is 4.1 percent of GDP.
Components of International Trade
The United States imports and exports both goods and services.
As shown in figure 4, currently goods account for 71 percent of our exports and 83 percent our imports.
Services account for 29 percent of our exports and 17 percent of our imports. (The spike in the graph in the percentage of imports that is made up of goods and the fall in the percentage that is services is due to the rather larger absolute decrease in imports of services during September.)
The major categories of goods imported and exported are:
- Capital goods (aircraft, semiconductors, computer accessories, machinery, engines)
- Vehicle parts and engines
- Industrial materials and supplies (metals, energy, plastics, textiles, lumber)
- Consumer goods (pharmaceuticals, apparel, toys, TV/VCRs, furniture, gem stones)
- Food, feed, and beverages.
The relative contributions of each to U.S. exports and imports for the year 2001 are illustrated in the two pie charts below.
In 2001, the United States exported more capital goods (for example, semiconductors, computer accessories, and electrical equipment and machines) than we imported. Food, feed, and beverages exported and imported were approximately equal. But in automotive products, consumer goods, and industrial supplies (crude oil, chemicals, newsprint, plastics, and others), we imported significantly more than we exported.
Automobiles (7%), semiconductors (5%), computers and accessories (5%), aircraft (5%) and telecommunications equipment (3%) are the largest components of U.S. exports. Among imports, automobiles (14%), crude oil (6%), computer accessories (6%), and apparel (4%) are the most significant goods categories..
The main categories of services include travel, fares, transportation, and royalties/license fees.
- Travel: Goods and services purchased by international visitors to the United States and U.S. citizens who are traveling abroad (food, lodging, recreation, gifts). (25% of exports, 29% of imports)
- Passenger fares: The transportation expenditures of people from the United States traveling abroad and individuals from other countries traveling to the United States (primarily airfare). (6% of exports, 11% of imports)
- Transportation: The transportation costs for goods moved by ocean, air, pipeline, and railway to and from the United States (5% of exports, 7% of imports)
- Royalties and license fees: Fees for patents, copyrights, and trademarks. (14% of exports, 8% of imports)
- Other: Government, defense and private services.
Changes in Imports and Exports of Goods and Services
The decrease in exports in October was due to a decrease in goods exported with a slight increase in services exported. The U.S. exported more consumer goods, but this was more than offset by fewer exports of food, feed, beverages, capital goods, and industrial materials, The increase in services exported was due to increases in other private services (which includes items such as business, professional, and technical services; insurance services; and financial services) and travel. The decrease in imports during October was due to a decrease in goods imported - primarily decreased imports of consumer goods, capital goods, and automobiles. Imports of industrial materials increased. Service imports increased slightly, mainly due to travel.
Ports located on the west coast of the United States were closed during the last two days of September (and the first eight days of October) due to a labor-management dispute. As a result, imports and exports of goods were halted in those ports. Analysts did estimate that the dispute cost the U.S. economy about $1 billion per day, but it is difficult to estimate the effect on the balance of trade as goods could not be received or shipped. Neither exports nor imports fell by anywhere close to $1 billion per day. The union argued that it was trying to save jobs that management wanted to eliminate through new technology and by hiring outside firms to provide the services. There were also disagreements over pensions and other benefits. On October 9th, President Bush ordered the longshoremen back to work, citing national interests under the Taft-Hartley Act and trade on the west coast resumed.
International Trading Partners
The graph above shows what percentages of United States imported goods come from each of our major trading partners and the percentage of our exported goods going to those same countries. These are percentages of United States exports and imports and do not necessarily represent a trade surplus or deficit with individual countries.
As you can see in the graph, 25% of goods exported from the U.S. are sent to Canada, while 20% of all U.S. goods imported come from Canada. Since our exports to Canada exceed our imports, the U.S. has a trade surplus in goods with Canada. The U.S. also has a trade surplus in goods with Mexico, Britain, and the Netherlands.
More frequently, the U.S. runs a trade deficit in goods - that is we are importing more goods from abroad than we are exporting. Trade with Japan accounts for 13% of U.S. imports and 9% of U.S. exports. We are also running a goods trade deficit with China, Western Europe, Canada, Mexico, and the OPEC countries. We are experiencing small goods surpluses with Australia, Hong Kong, and Singapore.
The Effects of Price Levels and Changes in Real GDP on Exports and Imports
Exports and imports are influenced by a variety of factors. Increases in income in the United States will increase the demand for all goods and services, including those that are imported. Thus, imports will rise as incomes increase. Increases in income in other countries have a positive effect on our exports. Decreases in income here cause exports to fall. Decreases in income among our trading partners cause our exports to fall.
Changes in prices here and abroad are also important. If we experience more inflation here than the rest of the world is experiencing, our goods cost more and thus our imports will rise and exports will fall. The reverse is true if the rest of the world experiences a greater rate of inflation than we do in the United States.
Changes in tastes will also affect import and export levels. If U.S. residents consume more fruit and vegetables, imports will increase. As the rest of the world finds U.S. software and airplanes more attractive, our exports will rise.
Changes in exchange rates influence exports and imports. Exchange rates are the prices at which currencies are exchanged. For example, one U.S. dollar can buy (or be exchanged for) approximately 10 Mexican pesos in international currency markets. Or, one Mexican peso costs about 10 cents. Most exchange rates are determined in open markets, and the rates depend upon the supply and demand for each currency.
If the international value (price) of the dollar increases (say from 10 pesos per dollar to 12 pesos per dollar), U.S. goods become more expensive for Mexicans and goods from Mexico become cheaper for people in the United States. Before the increase in the international value of the dollar, automobiles costing $20,000 in the United States cost an individual in Mexico 200,000 pesos ($20,000 times 10 pesos per dollar). After the change in the value of the dollar, the same car will cost will cost someone in Mexico 240,000 pesos ($20,000 times 12 pesos per dollar). Thus, Mexicans will purchase fewer U.S. cars.
At the same time, Mexican goods become less expensive for people in the United States. For example, a Mexican vacation stay that costs 40,000 pesos formerly cost someone from the United States $ 4,000 (40,000 pesos times $.10 per peso). Now, the vacation is cheaper for the United States as the cost of a peso falls from $ .10 to $ .083 (40,000 pesos times $ .083 per peso = $ 3,320).
There is a good bit of discussion in business and economics sections of newspapers about the “high” value of the dollar and whether or not it we would be better off if it came down. One of the reasons for concern with it value in terms of other currencies, is that while it lowers the costs of the goods and services we import, it increases the costs of our exports. Export producing industries are thus hurt by the “high” value of the dollar.
The Cause of Trade Deficits
One of the more difficult macroeconomic concepts is the determination of trade deficits or surpluses. If exchange rates fluctuate with the international supply and demand for a currency and if there are free flows of capital and goods, the relation of saving and investment in an economy determines the balance of trade in economies. For example, if saving (of all forms – personal, corporate, and government) is less than the amount of investment spending in an economy, there will tend to be upward pressure on interest rates (actually real interest rates). Those increases will tend to increase the international demand for the domestic currency. That increased demand will cause the international value of the currency to increase. In turn, the rise in the international value of the currency will make the country's exports more expensive for those abroad and thus exports will decrease. The country's imports will be less expensive and thus imports will increase. The result of the increase in imports and fall in exports will be a rising trade deficit (or a falling trade surplus).
In the current context of falling trade deficits, the explanation is exactly the opposite. The danger in asserting that opposite cause with a great deal of confidence is that the decreases in the deficit may be only temporary changes and not reflective of changes in the trend.
Interest in Tariffs and Quotas
Over the last year, the U.S. has established tariffs on steel and lumber imports and Canada and the European Union have threatened to place tariffs on goods exported from the U.S. Concern with rising unemployment during recessions and rising trade deficits often encourage governments to consider protecting domestic industries. Other countries often respond with tariffs of their own on other goods.
The U.S. International Trade Commission recently decided to uphold a 27 percent tariff on Canadian lumber imported into the U.S. These tariffs were imposed after U.S. lumber producers filed complaints that the Canadian government was subsidizing Canadian producers by charging them artificially low prices to cut timber on public land. This Canadian lumbar was then supposedly "dumped" into the U.S. lumber market at a lower price than domestic lumber could be produced. Domestic producers were hurt as a result.
The tariff on Canadian lumber acts to boost the price of Canadian lumber imported into the U.S. As U.S. demand for lumber increases, it is hoped that this will increase the prices and quantities of U.S. lumber thereby benefiting U.S. timber companies. The impact of these tariffs could be quite large. Lumber imported from Canada accounted for one-third of the U.S. lumber market last year.
In March, tariffs ranging up to 30 percent were placed on a variety of kinds of steel. The purpose was the same as the lumber tariffs – the production of U.S. firms and workers.
In both cases, the benefits of the tariffs are the jobs and profits of the industries directly affected. However, consumers and industries that purchase the goods pay the costs. In one estimate, the cost of each steel job saved, that is the increased prices of domestic and imported steel and the increased prices of goods using the steel, will likely be as much as $584,000 per job saved per year. Obviously, tariffs can be quite expensive ways of providing jobs.
The establishment of tariffs is unlikely to reduce trade deficits and unlikely to have long-run positive effects on unemployment. The current news attention being given to tariffs does offer an opportunity for classroom discussion of the benefits and costs of trade policies.
Questions for Students
What does it mean if a country has a balance of trade that is zero?
[It means that imports exactly equal exports.]
What does it mean if a country has a balance of trade that is in deficit?
[It is importing more goods and services than it is exporting. It is described as a "deficit" because the U.S. is sending more dollars abroad than it is getting in return.]
If we are currently experiencing a trade deficit of $38 billion, what will happen to the trade deficit if exports decrease by $1 billion and imports decrease by $2 billion?
[The trade deficit will go to $37 billion. Exports are added and imports subtracted to calculate the balance of trade. The $1 billion decrease in exports increases the deficit, while the $2 billion decrease in imports lowers the deficit. The net effect is to reduce the deficit by $1 billion.]
If the growth in spending is less in the U.S. than the rest of the world, what will be the likely effect on net exports? Explain why.
[Spending on imports will be likely to grow less than spending on exports and therefore net exports will rise.]
If inflation is lower in the United States than in countries with which the United States trades, what will likely happen to U.S. exports, imports, and net exports? Why?
[Relatively lower prices in the United States mean that people abroad will substitute now less expensive U.S. goods for some of their own goods. Thus, U.S. exports will increase. Some U.S. consumers will buy more U.S. goods and fewer goods from abroad, and thus U.S. imports will decrease. Net exports will increase.]
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