E C O N O M I C R E P O R T O F T H E P R E S I D E N T

opments was that the U.S. trade and current account balances swung muchmore sharply into deficit.Exchange rate movements, reflecting in part the desirability of U.S. assets,have also contributed to the rising trade deficit by affecting the relative priceof imports and exports. Chart 6-9 shows that, over the past several decades,the trade deficit has tended to rise when the dollar has strengthened. Between1995 and 1998 the dollar appreciated, although by less than in the 1980s.In addition to these factors, some of the recent increase in the trade andcurrent account deficits (and in the corresponding capital inflows) mayreflect other, more persistent factors. A possible explanation for such a “structural”current account deficit, as well as for some of its recent increase, isfaster U.S. productivity growth, as discussed in Chapter 2. If productivitygrowth has risen more in the United States than in other countries, this facttends to make the United States a particularly attractive place for investment,since the expected returns to capital then rise. Capital may then flow into theUnited States to finance this higher investment. To the extent this storyapplies to the United States today, it again emphasizes the relative strength ofthe U.S. economy.Clearly, then, large trade and current account deficits can easily coincidewith a strong and robust economy, as they do today. Hence, a trade deficitdoes not by itself have implications for the overall level of employment. Nevertheless,some sectors of the U.S. economy, such as manufacturing, may beharmed by increased competition from foreign imports and from reduced234 | Economic Report of the President