Economic Report of the President

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TABLE S-5.—Real appreciation of the dollar against major currencies to August 1982[Percent change from base year to August 1982']Base yearFrench francGerman markJapanese yen19711972 . ...-1.011.8-2.19.5=-25.3= 13.11973197427 921.431.431.02.06.41975197639 529.633.728.87.310.91977197829.443.035.950.124.32 53.11979198050 851.653.844.236.825.9198121.111.3a 22.91 Percent change in the price of the dollar In each currency, adjusted for differences in consumer price inflation.'Indicates a base year relative to which the August 1982 exchange rate of the yen looks lower than that of the othercurrencies.Source: Board of Governors of the Federal Reserve System.movements over the last several years stemmed from a strong dollarrather than a weak yen. An examination of Japanese policy by theU.S. Treasury supports this conclusion. This study found that Japanhas attempted to isolate its domestic capital market from world capitalmarkets, but that this has tended to limit capital outflow ratherthan inflow, supporting rather than weakening the yen. Japanese capitalcontrols have been relaxed in recent years, a move which theUnited States supports even though the result will be a weaker yenand an increase in Japan's current account surplus. In the 1980s,Japan may well become more of a capital exporter than it was in the1970s, and thus have larger current account surpluses. These surpluses,if they materialize, will result from Japan's high domesticsaving rate, which gives Japan a natural role as an exporter of capitalto the rest of the world.To show that there is no special yen issue is not to deny that asubstantial deterioration has occurred in the relative cost position ofU.S. firms. This deterioration was actually larger relative to otherindustrial countries, but since Japan is the United States' most importantcompetitor, the depreciation of the yen worries U.S. firms more.There is no special yen issue, but the strong dollar does pose genuineproblems.EFFECTS OF A STRONG DOLLAR ON U.S. TRADEThe rise of the dollar was associated with a large rise in the productioncosts of U.S. firms relative to those of foreign competitors.To take one measure, unit labor costs in U.S. manufacturing rose 32percent relative to those of a weighted average of other industrialcountries from their low point in the third quarter of 1980 to thesecond quarter of 1982. This rise in relative costs has at least tempo-66
arily reduced the international competitiveness of U.S. industry dramatically.Other U.S. exporting and import-competing sectors, especiallyagriculture, have also been squeezed.Despite this deterioration in competitive position, it was only in thethird quarter of 1982 that the U.S. trade deficit began to show a significantincrease. This delay was in line with previous experience ofthe effect of exchange rates on trade. The full effect of changes inexchange rates on the volume of exports and imports is felt onlyafter some time has passed, because some trade takes place undercontracts signed in advance and because customers do not alwayschange suppliers immediately when relative prices change. The shorttermeffect of a rise in the dollar is to reduce import prices, whichactually tends to improve the trade balance. Although the negative effectseventually dominate, some econometric estimates suggest thatthe full negative effect is not felt for more than 2 years.As the effects of the strong dollar are increasingly reflected in U.S.trade, the trade deficit will widen. Economic developments elsewherein the world will also contribute to a widening trade deficit. The recessionin other industrial countries will depress the demand for U.S.exports, and financial constraints in developing countries will leadthem to import less. Both developments will have negative consequencesfor U.S. exports. Record trade and current account deficitsin 1983 will almost surely result.Whether the trade and current account deficits persist will largelydepend on U.S. macroeconomic policies, particularly on the fiscalside. If large budget deficits are allowed to continue to depress theU.S. national saving rate, real interest rates may rise again, sustainingor even increasing the high real exchange rate of the dollar. In thiscase the trade deficit could remain high for several years.A large and sustained trade deficit would result in an economic recoverywhich would be "lopsided" in the sense that exporting andimport-competing sectors would not share in the gains. Should thisoccur, government, business, and labor officials must bear in mindthat even though protectionist foreign trade practices distort thecomposition of world trade and reduce economic efficiency both inthe United States and abroad, large trade deficits are not the resultof unfair foreign competition. Large projected U.S. trade deficits area result of macroeconomic forces, particularly large budget deficits.The main sources of the U.S. trade deficit are to be found not inParis or in Tokyo, but in Washington.RESPONSES TO THE STRONG DOLLARThe temporary adverse effects of a strong dollar create pressure todo something for the exporting and import-competing sectors. Three67
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CONTENTSPageECONOMIC REPORT OF THE
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ECONOMIC REPORT OF THE PRESIDENTTo
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Monetary policy will play a critica
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Interest Rates and the U.S. Trade D
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THE ANNUAL REPORTOF THECOUNCIL OF E
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CONTENTSPageCHAPTER 1. FROM RECESSI
Page 21 and 22: PageConclusions 122CHAPTER 6. REVIE
Page 23 and 24: CHAPTER 1From Recession to Recovery
Page 25 and 26: slowed somewhat in the 1970s regard
Page 27 and 28: nal GNP growth is reflected in a sl
Page 29 and 30: inflation. More specifically, the A
Page 31 and 32: inflation rate, or with a 12 percen
Page 33 and 34: 1988, an increase of about one-four
Page 35 and 36: CHAPTER 2The Dual Problems of Struc
Page 37 and 38: frequently associated with poor hea
Page 39 and 40: Chart 2-2Distribution of Unemployme
Page 41 and 42: Chart 2-4Distribution of Unemployme
Page 43 and 44: These findings suggest several conc
Page 45 and 46: Wage RigidityA number of studies sh
Page 47 and 48: that these measures may have caused
Page 49 and 50: Most young people find jobs or leav
Page 51 and 52: to employers who hire youths. Tax c
Page 53 and 54: defined broadly to include individu
Page 55 and 56: ship between incomplete experience
Page 57 and 58: CHAPTER 3The United States in the W
Page 59 and 60: with 2.6 percent in the other Organ
Page 61 and 62: TABLE 3-1 .—Structure ofthe U.S.
Page 63 and 64: TABLE 3-2.—Trade balances by comm
Page 65 and 66: concentrate on doing what it does r
Page 67 and 68: the United States will depress pric
Page 69 and 70: Chart 3-3Real Exchange Rates Of Maj
Page 71: AN UNDERVALUED YEN?The explanations
Page 75 and 76: nancial markets. These transactions
Page 77 and 78: TABLE 3-6.—Economic performance b
Page 79 and 80: were undoubtedly a highly favorable
Page 81 and 82: of lenders that some debtors will n
Page 83 and 84: CHAPTER 4Increasing Capital Formati
Page 85 and 86: ate of net investment was required,
Page 87 and 88: able share in Japan and 56 percent
Page 89 and 90: During the 1970s, productivity grow
Page 91 and 92: MEASURING NATIONAL SAVINGDomestic s
Page 93 and 94: TAX RULES AND PERSONAL SAVINGMany e
Page 95 and 96: on consumption taxation might also
Page 97 and 98: Nevertheless, a number of economic
Page 99 and 100: tion permitted businesses to deprec
Page 101 and 102: A final problem under current tax l
Page 103 and 104: fleeted efforts to deal with proble
Page 105 and 106: egulation was probably not applicab
Page 107 and 108: Aeronautics Board, for example, the
Page 109 and 110: system resulted. Price controls, wh
Page 111 and 112: NGPA, both controlled and decontrol
Page 113 and 114: Price and allocation controls only
Page 115 and 116: nications industries through the re
Page 117 and 118: Several major pieces of legislation
Page 119 and 120: tempt to set cartel rates would be
Page 121 and 122: computer information and advertisin
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of computer technology to the payme
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trend by widening the sources and u
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changes. That is, members can arbit
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ceived to be a consequence of exces
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lowest point in the post-World War
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ing. Partly in response to the drop
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Chart 6-3Ratio of Consumer Installm
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Chart 6-4RATIO1.85Real Inventory/Sa
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percent increase in real defense pu
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8.8 percent in 1981. These declines
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housing. Borrowing by the nonfinanc
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orous competitor for credit as usur
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1982 their share had risen to over
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TABLE 6-9.—Economic outlook for 1
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A critical element in achieving hea
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LETTER OF TRANSMITTALCOUNCIL OF ECO
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Report to the President on the Acti
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ety of interagency and internationa
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ence J. Kotlikoff (Yale University)
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CONTENTSNATIONAL INCOME OR EXPENDIT
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B-70. Mortgage debt outstanding by
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NATIONAL INCOME OR EXPENDITURETABLE
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TABLE B-2.—Gross national product
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19291933193919401941194219431944194
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TABLE B-5.—Changes in GNP and GNP
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TABLE B-ll.—Gross national produc
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TABLE B-13.—Output, costs, and pr
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TABLE B-14.—Personal consumption
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TABLE B-16.—Gross and net private
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TABLE B-18.—Inventories and final
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TABLE B-20.—Relation of national
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TABLE B-21.—National income by ty
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TABLE B-22.—Sources of personal i
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TABLE B-24.—Total and per capita
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Year or quarterTotalTotalTABLE B-26
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POPULATION, EMPLOYMENT, WAGES, AND
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TABLE B-29.—Noninstitutional popu
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TABLE B-31.—Selected employment a
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TABLE B-33.—Civilian unemployment
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TABLE B-35.—Unemployment by reaso
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TABLE B-37.— Wage and salary work
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TABLE B-39.—Average weekly earnin
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TABLE B-41.—Changes in productivi
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TABLE B-43-—Industrial production
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TABLE B-45.—Capacity utilization
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TABLE B-46.—New construction acti
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TABLE B-48.—Nonfarm business expe
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TABLE B-50.—Manufacturers' shipme
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Year or monthAllitemsPRICESTABLE B-
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TABLE B-53.—Consumer price indexe
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TABLE B-55.—Changes in consumer p
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TABLE B-57.—Producer price indexe
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MONEY STOCK, CREDIT, AND FINANCETAB
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TABLE B-63.—Commercial bank loans
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TABLE B-64.—Total funds raised in
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TABLE B-66.—Aggregate reserves of
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TABLE B-67 .—Bond yields and inte
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TABLE B-69.—Consumer installment
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TABLE B-71-—Mortgage debt outstan
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TABLE B-72.—Federal budget receip
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TABLE B-74.—Relation of Federal G
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TABLE B-76.—Federal Government re
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TABLE B-78.—State and local gover
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TABLE B-80.—Estimated ownership o
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CORPORATE PROFITS AND FINANCETABLE
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Year or quarterTABLE B-84.—Corpor
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TABLE B-86.—Relation of profits a
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TABLE B-88.—Determinants of busin
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TABLE B-9Q.~Current assets and liab
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TABLE B-92.—Common stock prices a
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AGRICULTURETABLE B-94.—Farm incom
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TABLE B-96.—Farm input use, selec
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TABLE B-98.—U.S. exports and impo
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INTERNATIONAL STATISTICSTABLE B-100
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TABLE B-101.—U.S. international t
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TABLE B-103.—U.S. merchandise exp
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TABLE B-105.—International invest
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TABLE B-107.— World trade balance
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TABLE B-109.—Growth rates in real
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TABLE B-lll.—Unemployment rate, a
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Economic Report of the President

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