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 March 7, 2015
The Consumer Price Index for All Urban Consumers (CPI-U) declined 0.7% in January on a seasonally adjusted basis. Over the last 12 months, the all-items price index fell 0.1%, the first 12-month negative change since the period ending October 2009. The gasoline index fell 18.7% and was the main cause of the decrease in the seasonally adjusted all items index. Core inflation rose 0.2% in January.
The unemployment rate fell to 5.5% in February of 2015, according to the Bureau of Labor Statistics release of March 6, 2015. Total nonfarm employment rose by 295,000. Job gains were particularly strong in food services and drinking places, professional and business services, and construction. Manufacturing employment also increased, although not as much as last month.
Real GDP increased 2.2% in the fourth quarter of 2014, according to the revised estimate released by the Bureau of Economic Analysis. This estimate is 0.4 percentage points less than the advance estimate. Consumer spending rose 4.2%, along with business investment, exports, and state and local government spending. Offsetting these gains were increases in imports and decreases in federal government spending.
In its January 28, 2015, statement, the FOMC cited the continued growth of the labor market, increased household and business spending, and below-target inflation as indicators of an economy that continues to recover. They expect below-target inflation to rise as oil prices and other "transitory" effects diminish. The statement reaffirmed the FOMC intention to keep the federal funds rate at its current low level. Notably, the FOMC added international variables to its list of factors to monitor for the timing of a rate increase.
The U.S. international trade deficit in goods and services increased by $4.3 billion to $31.2 billion in March. The increase in the trade deficit was due rising imports and falling exports. Imports increased by $3.4 billion while exports decreased by $0.9 billion.
The trade deficit (exports minus imports) increased rapidly from March 1998 to September of 2000. From September 2000 to January 2001, the trade deficit remained relatively stable around $33 billion and then fell. Although the trade deficit in March of $31.2 billion is higher than the trade deficit in February of $26.9 billion, it is still lower than it was at the end of 2000.
Exports and imports in dollars terms have been increasing for the last thirty years. As percentages of GDP, exports and imports rose rapidly in the 1970s, leveled off 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. In the 1980s, the rising deficit was primarily due to falling exports as a percentage of GDP. In the late 1990s, imports were rising more rapidly than exports.
Components of International Trade
The U.S. imports and exports both goods and services.
As shown in the graph to the left, goods account for 72 percent of our exports and 84 percent our imports.
Services account for 28 percent of our exports and 16 percent of our imports.
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); and
- food, feed, and beverages.
Their relative contributions to U.S. exports and imports are illustrated in the two pie charts below.
The main categories of services include travel, fares, transportation, and royalties/license fees.
- Goods and services purchased by international visitors to the U.S. and U.S. citizens who are traveling abroad (food, lodging, recreation, gifts). (29% of exports, 31% of imports)
- passenger fares:
- The transportation expenditures of people from the U.S. traveling abroad and individuals from other countries traveling to the U.S. (primarily airfare). (8% of exports, 11% of imports)
- The transportation costs for goods moved by ocean, air, pipeline, and railway to and from the U.S. (10% of exports, 19% of imports)
- royalties and license fees:
- Fees for patents, copyrights, and trademarks. (13% of exports, 7% of imports)
- Government, defense and private services.
In 2000, the U.S. actually exported more capital goods than we imported. Food, feed, and beverages exported and imported were about the same. But in automotive products, consumer goods, and industrial supplies, we imported significantly more than we exported. Some of the largest components of exports include: semiconductors (7.6%), computers and accessories (7.1%) and aircraft and parts (6.2%). Some of the largest components of imports include: crude oil (7.4%), computers and accessories (7.4%) and clothing and textiles (4.9%).
Changes in Imports and Exports of Goods and Services
|Changes in Exports for March (in Billions)
|Changes in Imports for March(in Billions)
The decrease in exports was due mostly to a decrease in goods exported. A decrease in capital goods offset the increases in the other sectors of goods exported with the exception of consumer goods which remained virtually unchanged. The increase in services exported was due to an increase travel and passenger fares.
The increase in imports occurred due to a rise in consumer goods imports. All other components of goods imported increased somewhat with the exception of food, feed and beverages and other goods. Services showed only a slight increase.
International Trading Partners
The graph above shows what percentages of U.S. goods imports come from each of our major trading partners and the percentage of our goods exports going to those same countries. These are percentages of U.S. exports and imports and do not necessarily represent a trade surplus or deficit. The U.S. currently has a trade deficit for manufactured goods with all of the countries listed above except for the Netherlands.
The Effects of Price Levels and Changes in GDP on Exports and Imports
Exports and imports are influenced by a variety of factors. Increases in income in the U.S. will increase the demand for all goods and services, including those that are imported. Thus, imports will rise. Increases in income in other countries have a positive effect on our exports. Decreases here and abroad work in the opposite directions.
Changes in prices 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.
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 productive, our exports will rise.
Exchange rates also influence exports and imports. Exchange rates are the rates at which currencies are exchanged. For example, one U.S. dollar will exchange in international currency markets for about 10 Mexican pesos. Or, one Mexican peso costs about 10 cents. Most exchange rates (actually prices) are determined in open markets and the rates depend upon the supply and demand for each currency.
If the value 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 U.S. An automobile costing $20,000 in the U.S. did cost an individual in Mexico 200,000 pesos ($20,000 times 10 peso 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 U.S. For example a Mexican vacation stay that costs 40,000 pesos, used to cost someone from the U.S. $ 4,000 (40,000 pesos times $.10 per peso). Now, the vacation is cheaper (40,000 pesos times $ .083 per peso = $ 3,320).
The Cause of Trade Deficits
One of the more difficult macroeconomic concepts to understand is the determination of trade deficits or surpluses. The relation of saving and investment in an economy determines the balance of trade in economies, if exchange rates fluctuate with the international supply and demand for a currency and if there are free flows of capital and goods. For example, if saving (of all forms - personal, corporate, and government) is less that the amount of investment spending in an economy, there will be 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 a rising trade deficit (or a falling trade surplus).
In the current context of a falling trade deficit, the explanation is exactly the opposite. The danger in asserting that cause with a great deal of confidence is that the fall in the deficit is for a single month and subject to a reversal or a revision.
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.]
- How can a country get more goods and services from abroad than it sends
[If the U.S. imports more than it exports, the rest of the world will end up with more dollars. (The U.S. will have paid out more dollars for its imports, than it received back for its exports.) If institutions and individuals in other countries want to use those dollars to make investments in the U.S., the value of the dollar will not change. If those dollars are not desired, there will be a surplus of dollars on the international market and the value of the dollar will fall. That will mean a reduction in imports and an increase in exports.]
- If the growth in spending in U.S. economy is slowing, what will be the
likely effect on imports? Explain why. If growth in spending is more rapid
in the U.S. than the rest of the world?
[If growth in U.S. spending is slowing, spending on imports will not grow as rapidly as they have been. In addition, if that slowing growth in U.S. spending is causing less inflationary pressure, U.S. goods become relatively cheaper and more people buy domestic goods and fewer imported goods. If growth in the U.S. is accelerating, the opposite result will true.]
- If inflation is higher in the U.S. than in countries with which the U.S.
trades, what will likely happen to U.S. exports? Why?
[Higher prices in the U.S. means that people abroad will substitute some other, now less expensive, goods for some U.S. goods. Thus, U.S. exports will decrease.]
- Why would a country want to place tariffs and quotas on imported goods?
[Tariffs are taxes placed on imported goods. Quotas are restrictions on the numbers of specific types of goods that can be imported. In both cases, the goal is usually to restrict imports and thereby protect a domestic industry from competition. While an industry and its employees and owners may benefit, the entire economy is likely to be worse off as a result. Less competition and less trade means that consumer well-being will be reduced.]