ANALYSIS OF THE U.S. TRADE DEFICIT

Mordechai Kreinin

No 1056, International Trade and Finance Association Conference Papers from International Trade and Finance Association

Abstract: A comparison of estimated import-demand equations between the U.S. and its main trading partners shows that the U.S. has a higher income elasticity of import demand than its trading partners; and that its elasticity exhibited a quantum jump in the years since 1995. Thus, if all countries experienced the same growth rate, the U.S. would develop a trade deficit, and some other countries--a surplus. The large and rising U.S. trade deficit is due both to high growth rate and high propensity to import. The paper does not address the question of whether the capital account drives the current account or vice versa. Given the U.S. price elasticity of import demand, it would require a 30 percent depreciation of the dollar to lower imports by 20 percent. Exports will then rise, but by a lesser amount. The overvalued dollar is one of three possible reasons responsible for the disconnect between GDP growth and corporate profit in the 2001-02 recovery, the other two being discount sales, and post 9/11 adjustment costs related to security.Presented at 12th International Conference, Bangkok, Thailand, May 2002.

Date: 2002-05-29
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