ECONOMIC

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currencies have appreciated relatively little in relation to the dollar. Any remainingdifference is due to the use of trade shares based on bilateral trade in 1972 ratherthan 1971.Other Methods for Computing WeightsOne problem associated with the use of these indexes is that the weights take intoaccount only bilateral trade with the United States, when, in fact, changes in anyone exchange rate affect trade of other countries as well. When the mark and theyen appreciate, for example, U.S. exports to Japan and Germany increase andimports from those two countries decline. In addition, third countries now findGerman and Japanese imports relatively more expensive than imports from theUnited States. For this reason, U.S. exports to third countries should also increase.One solution is to weight changes in each country's exchange rate by that country'simportance in total world trade. The multilateral index presented in Table 56is one such measure. For each of the countries in the Morgan Guaranty sample, thedepreciation of the dollar against each foreign currency is weighted by the sum ofeach country's exports to and imports from the other 14 countries (including theUnited States), divided by 1972 total trade among the 15 countries. The spot ratesused were daily closing rates in New York.An additional revision of weights based on past trade shares might incorporate theuse of price effects to anticipate the importance of changes in the value of each country'scurrency to U.S. trade. A country whose trade is more responsive to price changesshould receive a greater weight because changes in its exchange rate would have alarger impact on the U.S. trade balance than its relative trade share alone wouldindicate. A multilateral trade model may be used to compute a set of weights proportionalto the effects of bilateral exchange rate changes on the U.S. trade balance.To construct a trade model index of the depreciation of the dollar, weights werecalculated with the use of a preliminary version of a trade flow model developedby the Office of Economic Research of the Central Intelligence Agency. The modelassumes that prices have a significant effect on trade among the 17 countries andgroups of countries that are included. In the preliminary form of the model, producersof any one good which is traded internationally are assumed to react similarly to achange in the price of their product, no matter which country they live in. The U.S.supply of chemicals on the international market, for example, is no more sensitive tochanges in the domestic currency price of chemicals than is the supply from anyother country. Similarly, importers of any one good also react to price changes inthe same fashion, no matter where they live. As a result of these assumptions, theresponse of any two countries to a similar change in their exchange rates differsprimarily because the product mix of their trade differs.For July 6, 1973, the multilateral index showed an effective depreciation of thedollar equal to 20.54 percent, about 2 percentage points less than the MorganGuaranty index. For the same day the trade model index showed that the dollar haddepreciated 16.81 percent from May 1970, if the change in each currency is weightedby its relative contribution to the change in the U.S. trade balance. One reason whyboth these indexes show a smaller change in the value of the dollar than the MorganGuaranty index is that in both cases changes in exchange rates are expressed in termsof the depreciation of the dollar in relation to each foreign currency. The MorganGuaranty index, on the other hand, uses the appreciation of foreign currencies in relationto the dollar for part of its calculation, and the magnitude of changes expressedin this manner is greater.Another reason both these indexes may differ from the Morgan Guaranty index isthat the weights are calculated differently. While no simple pattern emerges from acomparison of the trade model weights with the bilateral weights, there is a clearpattern suggested by a comparison of the multilateral weights with the bilateral224
TABLE 57.—Changes in exchange rates from May 1970, 7970-73[Percent change]German markJapanese yenFrench francBritish poundYear and monthDollarrateEffectiverateDollarrateEffectiverateDollarrateEffectiverateDollarrateEffectiverate1970:June.0.750.510.31-0.120.590.24-0.10-0.64July..Aug..Sept.Oct..Nov..Dec..79.79.79.76.81.42.46.37.34.31.27-.06.17.49.57.61.64.65-.38.13.08.15.14.14.64.58.60.55.64.57.24.15.07.01.06.14-.39-.51-.61-.52-.40-.39-1.15-1.21-1.39-1.25-1.21-1.171971:Jan..Feb..Mar..Apr..May..June-July..Aug..Sept.Oct..Nov..Dec..64.99.79.713.014.215.147.159.0510.049.8211.97.04.33.13.061.813.873.734.865.375.575.075.28.56.69.70.70.72.72.731.216.508.739.5012.50-.15-.15-.15-.13-.31-.37-.38-.344.265.996.688.78.64.65.69.68.50.49.73.70.60.38.513.02.03-.12-.01.00-1.22-1.79-1.60-2.85-4.55-5.72-5.73-4.94.24.74.78.75.78.78.771.442.893.773.895.27-.69-.28-.26-.27-.76-1.04-1.12-1.29-1.07-.92-.98-1.131972:Jan..Feb..Mar..Apr..May..June.13.3014.8915.4515.1715.1215.514.715.015.105.094.885.0115.1217.9718.9918.5918.2719,0510.7512.7013.5413.2612.9313.407.369.1410.1710.2610.7710.73-2.23-1.71-.99-.60-.24-.377.128.499.098.768.857.05-.63-.25-.02-.14-.22-2.02July..Aug..Sept..Oct..Nov..Dec.15.7814.8614.6214.1314.2514.425.284.694.674.574.845.1319.5919.5319.5519.6019.6119.5114.2014.2414.3514.5514.7014.4711.0311.0110.9610.5610.199.18-.04.25.43.51.26-.821.862.091.71-.22-2.06-2.30-7.54-7.06-7.27-8.81-10.97-11.161973:Jan..Feb..Mar..Apr-May..June.14.5121.7830.1129.0231.1841.965.036.779.299.9310.3815.1119.2929.7537.4835.6036.0336.1113.7321.8825.1623.8923.7522.739.2616.5723.2521.9624.0930.37-.791.352.182.663.114.11-1.831.153.023.495.447.34-11.01-12.90-14.47-12.92-12.10-13.78July..Aug..Sept.Oct..Nov..Dec-56.7250.8650.9651.6341.8837.7221.3619.9819.6318.9916.2416.5436.0835.7335.6035.1729.3928.4921.5222.1021.7520.8017.3517.5236.9430.6730.3331.7326.0120.843.821.58.901.461.69.375.733.15.761.22-.54-3.44-19.20-19.76-22.39-22.73-20.71-21.54Note.—Monthly figures are averages of daily figures.Morgan Guaranty Trust Company computes the effective change in the value of foreign currencies by applyingthe same techniques used to compute the effective depreciation of the dollar.Sources: Federal Reserve Bank of New York and Morgan Guaranty Trust Company.weights. First, multilateral trade within the European Economic Community accountsfor a large share of total trade among the 15 countries in the multilateral index sample,and hence the relatively large depreciation of the dollar in relation to most Europeancurrencies is given a relatively large weight in the multilateral index. Second, becauseCanada accounts for only 9 percent of total trade among the 15 countries, the smalldepreciation of the U.S. dollar in relation to the Canadian dollar receives a muchsmaller weight in the multilateral index than in an index based on bilateral tradeshares. These two effects would tend to raise the level of the multilateral index andbring it closer to the Morgan Guaranty figure.225
Page 1:
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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ability were not perfectly correlat
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Farm wages and farm income received
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TABLE 37.—Average usual weekly ea
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Chart 9Real Incomes for Men in Diff
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ecause they have acquired more expe
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whose owners or white workers have
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Several factors can be mentioned to
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y social pressures, however, which
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TABLE 42.—Relation of wage and sa
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ferences in their mix of occupation
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for public housing may be valued by
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8 to 20 percent for black females.
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sufficiently high to cover the addi
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TABLE 45.—Federal Government tran
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given to the problems of poverty du
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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
Page 194 and 195: tarily by foreign central banks, ev
Page 196 and 197: ply of oil, and by domestic price c
Page 198 and 199: in the United States. In view of th
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 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
Page 249: Appendix CSTATISTICAL TABLES RELATI
Page 252 and 253: PRODUCTION AND BUSINESS ACTIVITY:Pa
Page 255 and 256: NATIONAL INCOME OR EXPENDITURETABLE
Page 257 and 258: TABLE C-2.—Gross national product
Page 259 and 260: TABLE C-3.—Implicit price deflato
Page 265 and 266: TABLE C—8.—Gross national produ
Page 267 and 268: TABLE C-10.—Gross national produc
Page 269 and 270: TABLE C-12.—Personal consumption
Page 271 and 272: TABLE C-14.—Relation of gross nat
Page 273 and 274: TABLE C—16.—Relation of nationa
Page 275 and 276: TABLE C-18.— Total and per capita
Page 277 and 278: TABLE C-19.—Sources of personal i
Page 279 and 280: 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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ECONOMIC

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