Economic Report President

The increase in the trade deficit and the negative contribution ofincreased imports are larger when measured in real terms rather thanas nominal dollar values, because import prices have fallen more thanexport prices. The dollar prices of imports from four East Asianeconomies (Hong Kong, Korea, Singapore, and Taiwan) fell 10.8 percentbetween August 1997 (at the onset of the Asian crisis) and December1998; the dollar prices of U.S. imports from Japan declined by 4.7percent over the same period. Although measures of import prices forthe other Asian crisis economies are not available, it is likely that theyfell by even more, because the depreciation of their currencies againstthe dollar was greater. Sharp drops in the global prices of many primarycommodities have also exerted downward pressure on U.S.import prices. Import prices for petroleum products were 43.0 percentlower in December 1998 than in August 1997; import prices for agriculturalgoods declined 3.3 percent over the same period. Despite theiroverall decline, the prices of U.S. imports from the Asian economieshave fallen by a smaller percentage than the values of their currencieshave against the dollar. This implies that the pass-through from thedepreciations to the decline in import prices has so far been less thanfull. Because U.S. export prices have also fallen, the decline in exportsof goods and services was more modest when measured in real ratherthan nominal terms.A Longer-Term Perspective on the Current AccountInternational trade has contributed greatly to growth and well-beingin the United States. Nevertheless, some contend that the large andgrowing U.S. trade deficit costs American workers jobs; others arguethat it reflects unfair trade practices of our trading partners or signalsa loss of U.S. competitiveness in world markets. The growing tradedeficit has indeed been associated with dislocations in some manufacturingindustries, but job gains in construction, services, informationtechnology, and other sectors not directly involved in internationaltrade have been greater than job losses in manufacturing. Argumentsabout the adverse consequences of trade deficits are largely misplaced:the rising U.S. trade deficit is primarily a reflection of strong U.S.investment, employment, and output growth, not a symptom of economicweakness.The current account and the saving-investment balance. Unravelingmisconceptions about the trade deficit requires an understanding ofthe trade balance and a closely related concept, the current accountbalance. A country’s trade balance is equal to the difference betweenthe value of its exports and the value of its imports—in other words,the value of goods and services sold by its residents to foreignersminus the value of the goods and services that its residents buy fromforeigners. The current account balance simply adds other sources offoreign income to the trade balance, to arrive at a complete accounting256