ECONOMIC

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in the United States. In view of the fairly large changes in relative labor costs(Table 51), the increase in foreign direct investment from none during thefirst 3 quarters of 1972 to $1.5 billion during the first 3 quarters of 1973 mayseem fairly small. Judging by the number and size of investment plans thathave been announced by foreign companies, however, this flow can be expectedto increase significantly in the next year.TABLE 51.—Relative labor costs in manufacturing, 1968-73[1967=1001Country and yearHourlycompensationinnationalcurrencyOutput perman-hourUnit laborcost innationalcurrencyValue offoreigncurrencyrelativeto the U.S.dollarUnit laborcost inU.S.dollars^Index of U.S.unit labor costas percent ofindex offoreign unitlabor costUnited States:196819691970197119721973107.2114.0122.2130.8139.0150.0104.8107.3108.0115.7121.3127.5102.3106.3113.2113.0114.1117.6102.3106.3113.2113.0114.1117.6Germany:1968196919701971.19721973 2105.9115.5133.0152.1169.4190.5107.6113.8116.7122.4131.0140.598.5101.5114.0124.3129.4135.599.9101.6109.3114.7125.0150.598.3103.1124.6142.5161.7204.0104.0103.190.979.370.657.6Japan:196819691970 . . .. .197119721973 2 .. .116.2137.3163.4189.0219.5265.1112.6130.0146.5151.7167.0198.4103.2105.8111.5124.6131.5133.7100.4101.1101.1104.2119.5133.7103.7106.9112.7129.9157.1178.798.699.4100.487.072.665.8Canada:1968196919701971.197219732107.3115.3124.5134.5144.5157.4107.3113.2115.0121.6126.9133.5100.0101.9108.2110.6113.8117.9100.1100.2103.4106.8108.9107.9100.2102.1111.9118.2124.0127.2102.1104.1101.295.692.092.5i Indexes in national currency adjusted for changes in prevailing exchange rates.a Based on seasonally adjusted data for first 9 months.Note.—Data relate to all employees in manufacturing.Sources: Department of Labor (Bureau of Labor Statistics) and Council of Economic Advisers.Foreign purchases of U.S. securities other than U.S. Treasury securitiesalso increased, from $2.6 billion during the first 3 quarters of 1972 to $3.4billion during the first 3 quarters of 1973. Such an increase is also consistentwith what one would expect from the large depreciation of the dollar, inasmuchas the depreciation should increase the relative profitability of producingin the United States. Market expectations also exerted a strong influenceon the flow of security transactions over the year. Foreign purchases of U.S.securities were quite large in the first quarter, reaching a total of $1.7 billion.During the second quarter, purchases fell to $0.5 billion, but increased againto $1.2 billion in the third quarter.Direct and portfolio investments abroad by Americans amounted to $3^2billion during the first 3 quarters of 1973, as they had during the first 3192
quarters of 1972. There are two possible reasons for the absence of a decline:First, economic conditions were buoyant throughout the world. Second,most of the outflow occurred in the first quarter, before the major exchangerate adjustments of 1973, and was probably motivated by the anticipationof subsequent exchange rate adjustments.The U.S. Balance of Payments in 1973In a world characterized by the managed floating of exchange rates, measurementof the overall balance of payments has become less important. Ina fixed exchange rate world, one of the major functions of overall measuresof the balance of payments was to signal to policy makers when a given exchangerate had become untenable. To the extent that exchange rates areallowed to adjust automatically in response to payments imbalances, it is nolonger necessary to communicate the desirability of an exchange rate adjustmentto the policy maker. Of course, to the extent that exchange ratesremain constrained by official intervention in the foreign exchange market,the balance of payments numbers will continue to indicate when such interventionmay need to be relaxed.The managed floating of exchange rates has changed in particularthe analytical meaning of the official reserve transactions balance, whichmeasures the net direction and magnitude of official intervention in theforeign exchange market over a period of time. In other words, it approximatelyshows the extent to which governments have bought or soldcurrencies to influence the exchange rate. It also includes government-togovernmentpayments outside the foreign exchange market, but removingthese transactions from the foreign exchange market has the same effect asdirect intervention. As long as governments kept market exchange ratesrelatively fixed by buying and selling foreign exchange, the net amount ofsuch official purchases or sales provided an estimate of the net deficit or netsurplus of a given currency traded in the market. To the extent that governmentsno longer attempt to keep market exchange rates from falling belowor rising above a fixed level, changes in the net demand or supply of a currencyare reflected in a movement of the exchange rate rather than in a netloss or gain of reserves. Since exchange rates were at first fixed and thenfloating to varying degrees in 1973, changes in market pressures were reflectedin part by changes in exchange rates and in part by net changes ininternational reserves, that is, by the official reserve transactions balance.As measured by the official reserve transactions balance, the UnitedStates had a deficit of $10 I / 2 billion in the first quarter, a surplus of $J/ 2billion in the second quarter, and a surplus of $2 billion in the third quarter(Table 52). That is, in the first quarter, governments purchased roughly$10^2 billion to keep the dollar higher than it would otherwise have been;in the second quarter, governments more or less allowed the dollar to find itsown level in the market; and in the third quarter, governments sold roughly$2 billion, to keep the dollar lower than it would otherwise have been.193
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ECONOMICTRANSMITTEDTO THE CONGRESSF
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CONTENTSPageECONOMIC REPORT OF THE
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ECONOMIC REPORT OF THE PRESIDENTTo
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of the inflation rate of 1973, and
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or permit incentives—including hi
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people of an easy time. Like our pa
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THE PRESIDENT:LETTER OF TRANSMITTAL
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CHAPTER 3. INFLATION CONTROL UNDER
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Page7. Unemployment Rates by Sex an
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Page53. Maximum Percent Change in E
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We have specific problems, too, asi
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This curtailment of supply does, of
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consumption we would not have chose
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outside the food and fuel sectors a
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about $14 billion from deficit to s
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8 percent, at annual rates. Continu
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A third method, which seems to have
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DEVELOPMENT OF LOW-COST ENERGY FOR
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would otherwise have been invested
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TRANSPORTATION REFORMLast year the
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constraints. Restrictions on entry
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In early 1974 the Commerce Departme
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Consumer SpendingConsumer expenditu
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Chart 1Changes in GNP, Real GNP, GN
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During the fourth quarter the downt
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A number of points may be noted abo
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income do not appear to have played
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Chart 2Changes in Real GNPPERCENTUN
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of essentially declining participat
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The unemployment rate for adult mal
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from job losers, the remainder of t
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to maintain a somewhat larger work
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Chart 3Changes in Selected Price Me
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TABLE 12.—Changes in selected pri
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production workers, and it is sensi
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the profits that companies report a
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Two measures of changes in income t
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About $8 billion of the growth in e
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effect of covered wage and employme
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Since these apparent stabilization
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MONETARY POLICY AND FINANCIAL MARKE
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lation requiring ceilings on all CD
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TABLE 19.—Offerings of new securi
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CHAPTER 3Inflation Control Under th
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(A more detailed presentation of th
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ate of advance in grocery store foo
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to the economy but also in the sens
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were imposed, limiting prices to th
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spurring of domestic inflation by e
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was more than twice as high in 1973
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wage increases in many cases, const
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TABLE 26.—Behavior of items in co
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Chart 6Changes in RelatedWholesale
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and natural gas. A complex set of f
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CHAPTER 4Energy and AgricultureFOR
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al gas have contributed to the low
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TABLE 30*—Wholesale prices, all i
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tion sector, which in 1972 accounte
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United States on oil imports, OPEC
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of old oil and prices of imported a
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LONG-TERM PROSPECTSThe price of imp
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important that the higher costs be
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improving the environment. The fund
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pollutants into the atmosphere will
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of research and rapid mechanization
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lion in fiscal 1972. Actually the a
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a minimum income. Unless prices fal
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The Administration supports the exa
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and estimates of some of these effe
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Since families typically pool their
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Page 150 and 151: Farm wages and farm income received
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Page 154 and 155: Chart 9Real Incomes for Men in Diff
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Page 158 and 159: whose owners or white workers have
Page 160 and 161: Several factors can be mentioned to
Page 162 and 163: y social pressures, however, which
Page 164 and 165: TABLE 42.—Relation of wage and sa
Page 166 and 167: ferences in their mix of occupation
Page 168 and 169: for public housing may be valued by
Page 170 and 171: 8 to 20 percent for black females.
Page 172 and 173: sufficiently high to cover the addi
Page 174 and 175: TABLE 45.—Federal Government tran
Page 176 and 177: given to the problems of poverty du
Page 178 and 179: TABLE 47.—Trends in the employmen
Page 180 and 181: enefit increases greater than the i
Page 182 and 183: (Table 45). Medicare is chiefly des
Page 184 and 185: Public assistance is specifically d
Page 186 and 187: Then, subtracting equation (4) from
Page 188 and 189: policies, and the tensions among co
Page 190 and 191: In the fourth quarter the dollar ro
Page 192 and 193: which include trade, grants and oth
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Page 200 and 201: TABLE 52.—U.S. balances on intern
Page 202 and 203: esult from changes in market value
Page 204 and 205: TABLE 54.—Major changes in capita
Page 206 and 207: attempt was made to agree on a code
Page 208 and 209: The official price of gold was rais
Page 210 and 211: system, these demand changes were a
Page 212 and 213: What Pressures Should Be Exerted on
Page 214 and 215: The composition of reserves among d
Page 216 and 217: prices of approximately the same or
Page 218 and 219: tained, they would probably be felt
Page 220 and 221: Reducing Nontariff BarriersIn order
Page 222 and 223: Structural problems. Agreements on
Page 224 and 225: arrangements which are designed to
Page 226 and 227: capital and the means of putting th
Page 228 and 229: Canada and four smaller countries u
Page 230 and 231: currencies have appreciated relativ
Page 232 and 233: Effective Changes in Other Currenci
Page 235 and 236: Activities of the Advisory Committe
Page 237: Appendix BREPORT TO THE PRESIDENT O
Page 241 and 242: Report to the President on the Acti
Page 243 and 244: govern the exploitation of the reso
Page 245 and 246: Manpower and Social Affairs Committ
Page 247 and 248: Junior Staff EconomistsJames S. Fac
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Appendix CSTATISTICAL TABLES RELATI
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PRODUCTION AND BUSINESS ACTIVITY:Pa
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NATIONAL INCOME OR EXPENDITURETABLE
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TABLE C-2.—Gross national product
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TABLE C-3.—Implicit price deflato
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TABLE C—8.—Gross national produ
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TABLE C-10.—Gross national produc
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TABLE C-12.—Personal consumption
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TABLE C-14.—Relation of gross nat
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TABLE C—16.—Relation of nationa
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TABLE C-18.— Total and per capita
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TABLE C-19.—Sources of personal i
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TABLE C-21.—Saving by individuals
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POPULATION, EMPLOYMENT, WAGES, ANDP
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TABLE C-24.—Noninstitutional popu
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TABLE C-26.— Selected unemploymen
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TABLE C—28.—Unemployment insura
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TABLE C-29.—Wage and salary worke
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TABLE C-31.—.•Average weekly ea
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TABLE C-33.—Changes in output per
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TABLE C—35.—Industrial producti
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TABLE C-37.—Capacity utilization
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TABLE C—38.—New construction ac
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TABLE C-39.—New housing starts an
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TABLE C-41.—Sales and inventories
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TABLE C-43.—Manvjacturers* new an
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TABLE O45.—Consumer price indexes
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TABLE C—47.—Consumer price inde
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TABLE C~49.—Wholesale price index
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TABLE C-50.—Wholesale price index
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194819491950.,1951195219531954Yearo
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TABLE C-53.—Commercial bank loans
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TABLE G-54.—Total funds raised in
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TABLE C-56.—Federal Reserve Bank
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TABLE C-58.—Bond yields and inter
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TABLE C-59.—Short- and intermedia
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TABLE C-61.—Mortgage debt outstan
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TABLE C-63.—Net public and privat
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TABLE C-65.—Federal budget receip
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TABLE C-66.—Relation of the Feder
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TABLE C-68.—Receipts and expendit
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TABLE C-10.—State and local gover
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TABLE C-72.—Estimated ownership o
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CORPORATE PROFITS AND FINANCETABLE
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TABLE C-76.—Relation of profits a
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TABLE C-77.—Sources and uses of f
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TABLE C-79.—State and municipal a
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TABLE C-81.—Business formation an
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Year1929...1933...1939...1940...194
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TABLE C-85.—Indexes of prices rec
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TABLE G-87.—Comparative balance s
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TABLE G-88.— U.S. balance of paym
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TABLE C-90.— U.S. merchandise exp
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TABLE C-92.—International reserve
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TABLE G-94.—International investm
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TABLE C-96.—Consumer price indexe
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