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The U.S. international trade deficit in goods and services slightly increased to $40.3 billion in July from a revised $40 billion in June. Exports increased by $1.7 billion and imports increased by a slightly larger number, $2.0 billion).

KEY CONCEPTS

Exchange Rate, Exports, Imports

Current Key Economic Indicators

as of May 5, 2013

Inflation

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.

Employment and Unemployment

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 GDP

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.

Federal Reserve

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...

MATERIALS


Announcement

The U.S. international trade deficit in goods and services slightly increased to $40.3 billion in July from a revised $40 billion in June. Exports increased by $1.7 billion and imports increased by a slightly larger number, $2.0 billion).

[Note to teacher: 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.

Data Trends

July exports were $86.1 billion and imports were $126.5 billion, leading to an overall trade deficit of $40.3 billion. Exports of goods increased to $60.5 billion, and imports of goods increased to $105.8 billion. Exports of services increased to $25.2 billion, and imports of services increased to $20.7 billion.

The July deficit was up by $6.3 billion from 12 months earlier as exports rose by 3.9 percent and imports increased by 8.1 percent.

Figure 1: Monthly Balance of Trade in Goods and Services

 

Figure 2: Exports and Imports of Goods and Services (Annual GDP 1970-2001)

Exports and imports in dollar terms have been increasing for the last 30 years. Exports and imports as a portions 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 10.9 percent of GDP; imports are 16.6 percent; and the trade deficit is 5.6 percent of GDP.

Figure 4: A breakdown of Exports and Imports by Goods and Services

Components of International Trade

The United States imports and exports both goods and services.

Figure 4: A Breakdown of Exports and Imports by Goods and Services

As shown in Figure 4, currently goods account for 70 percent of our exports and 84percent our imports.

Services account for 30 percent of our exports and 16 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, 2001.)

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 2002 are illustrated in the two pie charts below.

 

Figure 5A: Components of Exported Goods and Services (2003 to-date)


Figure 5B: Componenets of Imported Goods and Service (2003 to-date)

In 2002, 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 (8%), 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.

  • 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

Table 1: Import and Export data for July 2003
CategoryChangeTotal
Changes in Exports for July
(in Billions)
   

Exports   $1.7   $86.1
Goods   $1.3   $60.5
Capital Goods   $0.6    
Automotive...   $0.3    
Consumer Goods   -$0.1    
Industrial Supplies   $0.4    
Food, Feed, Bev.   $0.2    
Other goods...   -$01    
Services   -$0.2   $25.6
CategoryChangeTotal
Changes in Imports for July
(in Billions)
   

Imports   $2.0   $126.5
Goods   $3.6   $105.8
Capital Goods   $0.0    
Automotive...   -$0.1    
Consumer Goods   $0.7    
Industrial Supplies   $1.0    
Food, Feed, Bev.   $0.1    
Other goods...   $0.0    
Services   $0.0   $20.7

[The June to July change in exports of goods primarily reflected increases in capital goods ($.6 billion), industrial supplies ($0.4 billion), automotive ($0.3 billion), and food ($.2 billion).

The June to July change in imports of goods reflected increases in foods, feeds, and beverages ($0.1 billion), industrial supplies and materials ($1.0 billion), automotive ($.1 billion), and consumer goods ($0.7 billion).

Services exports increased $0.4 billion from June to July. Increases in travel and other passenger fares and in other private services were small.

Services imports increased by $.5 billion from June to July. There were smaller increases in other transportation, travel and passenger fares, and other categories of services imports.

For more information on the trade report, visit
]

International Trading Partners

Figure 6: The Major Trading Partners of the U.S. in Goods for 2001

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, 26% of goods exported from the U.S. are sent to Canada and almost 15% are sent to Mexico. Eighteen percent of all U.S. goods imported come from Canada and more than 10% come from each of Mexico, China, and Japan. The U.S. also has a trade surplus in goods with Mexico, Britain, and the Netherlands.

The U.S. runs a trade deficit in goods - that is we are importing more goods from abroad than we are exporting. The largest deficits are with China, Japan, Canada, Mexico, and Germany. We are experiencing small goods surpluses with Australia, Belgium, The Netherlands, and Hong Kong.

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.