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Federal Reserve Bank of St. Louis
Collection: Paul A. Volcker Papers
Call Number: MC279
Box 23
Preferred Citation: Balance of Payments- Project Team Documents 1, 1971-1973; Paul A. Volcker
Papers, Box 23; Public Policy Papers, Department of Rare Books and Special Collections, Princeton
University Library
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iJiier
,r.)cr,
:tary Volcker
P.(wiew of The :retry
Jc'd:11=y
in of ,the West by jacques
Tiff
AttacIle6 is the paper by Lob Itin(lell which you asked
a1 out. It i.
review of Jacques :aueff, The :
,
:onetarv
in
of
t7
-1c.
-----------t7undell differs with 2
- „ueff's interpretation of 20t;:i
entury monetary exnerience and argues that "qold is
loncr crciblo as an altrnative to the cf:ollar (.17).
argues that the 1971 crisis was riore psychological •
tin economic i'J.K1 'that it has helnc;d official to urstand the 1944-71 svster,1 hr,fter than before, z.=.,1 to 1.rn
that co'.-1..anr.
rate change now have 1,
:,= effcts on real
outut an trade balances than en price level movc7!ents.
The world economy is now more securely on the dollar •
standard than it ever was before' (p. 17)
lundell favors the creation of a single world currency
for international use. he would allow both central banks
and private citizens to buy and sell gold freely.
With respect to the official price of gold, he argues
that in an inflationary world such as today's, an incro
would.
correct only if it were to accmplish a chanoe in
the system. itself (p. 12), nueff envisions such a cou7Jin9,
but Tur(:Iell wdrn':; t]kat "the drawback of his recorendation
is that countries could be ternted to accept the increase
in the price of gold while rejecting the change in the
system that must accompany it in order to justify it (p. 12)
1-:unClell also argues that Rueff does not carry Far
enoufrh tho lcr-ic of is tlft'?ory of montar7 sin. 'T.L
(-Told stan'jard was 'corrupted first
sin of
then by Lha ot:tabliL;hinent of central
and thcn by t7._
ace.7u1itin by
lttor of cf:nnt ]-:,7:1s in
assts' (p. 1,1. To retore
en1in(7 not jvit thc ourrencv coponent ci 1nterntz,tiono,1
1)tic all T7)7r c:rrcnol. To 3,7intro.111c.
a purc.
\7ste,
a
in t.
pric .of (jol(i to over
ounce!' (p. 15)
cc
isra
OASIA:TD1q.1
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Federal Reserve Bank of St. Louis
J1(L,L,
Venneoy, Cross, TA31is,
nett:rew 1/16/73
•
,t
Removal Notice
The item(s) identified below have been removed in accordance with FRASER's policy on handling
sensitive information in digitization projects due to copyright protections.
Citation Information
Document Type: Working paper
Citations:
Number of Pages Removed: 40
Mundell, Robert A. "The Monetary Consequences of Jacques Rueff." October 1972.
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c,„171-1 . . ..„1.)
x
Cl
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OPTIONAL FORM NO. 13
MAY 14,2 E.D.TION
GSA FPAIR (41 CFR) 101-11.6
UNITED STATES GOVERNMENT
randun
:Under Secretary Designate Bennett
TO
Through:
FROM
:
SUBJECT:
DATE: February
13, 1974
Assistant Secretary Hennessy
Sam Y. Cross
Revision of Calculations of Trade-Weighted Average Exchange
Rate Changes
In response to your interest in seeing trade-weighted
exchange rate changes calculated on the basis of trade
coverage broader than that used in our "OECD" calculations,
Mr. Leddy and Mr. Swofford have enlarged the model to cover
an additional 26 countries outside the OECD (now 23), for a
total coverage of 49 countries. (As you know, our previor.D
estimates of trade-weighted changes against the "world" have
been based on highly imprecise calculations of the non-OECD
group's exchange rate change against the dollar.) With this
enlargement, our new model covers countries accounting for
approximately 90 percent of U.S. trade and an average of
approximately 94 percent of the trade of each of the other
OECD countries. In addition, calculations can now be made
to show trade-weighted exchange rate changes for a number of
the more important non-OECD countries, e.g., Brazil, Mexico,
India, South Africa. The trade data base has been updated
from 1970 to 1972.
In the process of expanding the country coverage, we
have also made changes in the averaging technique which
we believe improve the calculations considerably.
a)
The calculation technique has been revised to
produce a single figure for "effective" exchange
rate change, in contrast to the ambiguous and
awkward reciprocal figures produced by the earlier
version. (Depending on the measurement of nominal
exchange rate changes used--i.e., local currency
per unit of foreign currency versus foreign currency per unit of local currency--the earlier
model would produce either 1) an average change
for the currency concerned vis-a-vis other currencies or 2) the reciprocal, an average change
for other currencies vis-a-vis the currency concerned.) The differences between the alternative
reciprocal measurements have become quite large
since the Smithsonia:. realignment.
jisirs(
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Federal Reserve Bank of St. Louis
Buy U.S.
Bonds Refzularly on the Payroll Savings Plan
- 2 b)
c)
The revision involves separate calculation of an
import-weighted average change in the home currency
cost of foreign exchange and an export-weighted
average change in the foreign exchange cost of home
currency.1/ The separate calculations are then
weighted by the importance of exports and imports
respectively in the home country's total trade,
and averaged to produce a single figure for
"effective" change for the home currency. In
addition to matching appropriate measures of exchange rate change and trade shares, this revised
technique takes into account differences between
the geographical distribution of a country's exports and that of its imports. (The earlier version
used total trade as the weighting pattern regardless
of the measure of exchange rate change used.) The
revised technique is similar to that used by Morgan
Guaranty.
The program has been made considerably more flexible.
It can accommodate up to nine separate country
groupings as desired (e.g., OECD, world, EC, G-10,
etc.) simultaneously, and can be changed easily to
cover any time periods and alternative base dates
desired.
In addition, we have extended the calculations back to
1960 to provide a consistent historical series. Historical
charts and tables for the U.S. and several other major countries--utilizing May 1970, prior to the Canadian float, as
the base date--are attached at Tab A.
Also attached (Tab B) is a comparison of calculations
for the dollar produced by the new and old models. You .will
1/
The logic of the new technique is that for each country,
it applies the pattern of its imports to changes in the
cost of foreign exchange and the pattern of its exports
to changes in the cost of its currency to foreigners.
Assuming exchange rate changes are immediately and fully
reflected in the prices at which trade is conducted, a
10 percent devaluation by the U.S. reduces the cost of
U.S. exports to foreigners by 10 percent, and the pattern
of U.S. ex1Dort3is the appropriate weighting pattern to
apply to this 10 percent figure. The same change, however,
causes an increase of 11.1 percent in the cost of foreign
exports to the U.S., and the pattern our imports is the
appropriate weighting pattern to apply to the 11.1 percent figure.
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Federal Reserve Bank of St. Louis
3
note that there is very little difference between the new
figures and the old calculations of "average foreign cur—
rency movements against the dollar"--that is, appreciation
of other currencies relative to the dollar--which is the
series we have used most of the time.
A more detailed technical explanation of these revisions
is attached at Tab C.
Attachments
cc:
Messrs. Volcker, Worthington, Willett, Larsen, Willis, Widman
Syvrud, Auten, Nelson, Klock, Fauver, Dale (IMF)
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Federal Reserve Bank of St. Louis
Graphic Presentation of
Trade-Weighted Exchange
Rate Changes
The attached charts are a historic presentation of
the trade-weighted exchange rate changes of the seven
yed
major industrial countries. Although the model emplo
ries,
49
count
ins
conta
ns
latio
in producing these calcu
only 44 were included for the following reasons:
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Federal Reserve Bank of St. Louis
1)
Hong Kong and Indonesia were excluded for
the lack of complete and consistent data.
2)
Argentina, Brazil and Chile were excluded to
ns
eliminate the effects of extreme fluctuatio
er
in their exchange rates during the earli
periods.
TRADE-WEIGHTED APPRECIATION or DEPRECIATION
OF THE U.S. DOLLAR : MAY 29, 1970-100
Au
,
.....N..-.du•mmt•rrisp....
avv.,..v..r. 5.-
against 44 countries
1.20
OECD currencies
, 1
vomilaimusrarmswar.;•
tmgronnergyresammxte,
•
1
75
75
110
,
L_
100
r—
N
90
...
80
2/73
1
).t
'
1960
.•
1961
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Federal Reserve Bank of St. Louis
1962 1 1963
1.964
1965 1 1966 I 1967
5
/
45
1
1968
1969
1970
1971
1972
0
3
7
/
73
12/r3
TRADE-WEIGHTED APPRECIATION or DEPRECIATION
OF THE U.K. POUND : MAY 29, 1970..100
L‘imirannulus
itares
i
122,2
;
against 44 currencies
1
1
1'
1
:----------egainst OECD currencies
'ger-
120
.1
1
1
1
1
110
15
100
•1•
90
...
80
2/73
1
;
1960
1961
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Federal Reserve Bank of St. Louis
1962
1963
:• •
1964
7.;
.&•*.
r
1965
•:i '
?
1966
1967
t•
1
;
1968
1969
1970 1 1971
I 1972
1
3/13
I
1
4/1.5
'
5/73
a3
MM.
TRADE-WEIGHTED APPRECIATION or DEPRECIATION
OF THE GERMAN MARK : MAY 29, 1970-100
....L.smingammmummmammommor
130
10
against 44 currencies
----------against OECD currencies
'
120
7S
It•S
110
100
•
-- -
90
--
•
2/73
so
'
10
s
1
f
473
1960
1961 I 1962
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Federal Reserve Bank of St. Louis
1963 1 1964
1965
1966
1967
1968
1969
1970
1971.
1972
6173
TRADE-WEIGHTED APPRECIATION or DEPRECIATION
OF THE FRENCH FRANC : MAY 29, 1970*'100
4
against 44 currencies
----------against OECD currencies
.
.).314.4
7 7
rirr
I !
120
!
1
'
1
I
—_
110
/
I:
I
100
4
90
2s
:
2/73
80
tr:
'
- I -
I '
L 1960 1961
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Federal Reserve Bank of St. Louis
1
t:
1962
1963
1964
1965
1966
1967
1968
1969
1970
•• r
1971
r
3/;3ofli
1972
q//,'
,),/
TRADE-WEIGHTED APPRECIATION or DEPRECIATION
OF THE ITALIAN LIRA : MAY 29, 1970'-100
against 44 currencies
9
----------egainst OECD currencies
'
120
•H>
7S
110
SS
100
14—.44
.4•••••
44'7
90
^
..
•
I '•
1 .
•
80
2/73
it
•:
7-
1960
1 1961
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Federal Reserve Bank of St. Louis
c:
I 1962 , 1963
•
=
1964
1965 I 1966
..:
1
1967
1968
1969
1970
1971
•
n
1972
3173
I
e/73
'03 103
TRADE-WEIGHTED APPRECIATION or DEPRECIATION
OF THE CANADIAN DOLLAR : MAY 29, 1970-100
against 44 currencies
„
120 ^
15
----------against OECD currencies
-
110
100
4,
35
90
Yr
2/73
80
•
t(-4
1960
1961
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Federal Reserve Bank of St. Louis
1962
1963
I 1964
1965
1966
1967
;
'
1968 1 1969
1970
- ,
1971
. I 1
4/7.3 c/73 9/73
1972
45,
TRADE-WEIGHTED APPRECIATION or DEPRECIATION
OF THE JAPANESE YEN : MAY 29,1970100
: 1
4
against 44 countries
120
OECD currencies
110
100
4)
IS
90
2/73
—71
...
80
!
•
t
318
1960
1961
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
0-5
V/13
403
TRADE-WEIGHTED AVERAGE APPRECIATION (+)
OR DEPRECIATION (-) OF CURRENCY CONCERNED
VIS-A-VIS OTHER OECD CURRENCIES
(Percent Change Relative to Base Rates as of May 29, 1970)
AS OF:
(END OF
PERIOD)
U.S.
DOLLAR
1960
1961
1962
1963
1964
1965
1966
1967
1963
1969
1970
1971
1972
1973-Jan.
1973-Feb.
1973-Mar.
1973-Apr.
1973-May
1973-June
1973-July
1973-Aug.
1973-Sept.
1973-Oct.
1973-Nov.
1973-Dec.
1974-Jan.
-3.9
-2.5
-1.5
-1.2
-1.6
-1.4
-1.0
+0.7
+0.4
+0.1
-2.0
-8.2
-9.4
-9.8
-16.1
-15.8
-15.6
-17.4
-19.6
-19.8
-18.3
-18.6
-13.9
-15.5
-14.7
-12.0
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Federal Reserve Bank of St. Louis
U.K.
POUND
+12.5
+12.3
+12.3
+12.1
+11.8
+12.3
+12.1
+ 0.1
- 0.6
+ 0.1
- 0.5
+ 0.1
- 9.9
- 9.1
-12.9
-11.5
-10.8
-10.6
-13.7
-13.0
-17.1
-20.4
-19.1
-19.2
-18.7
-13.0
FRENCH
FRANC
+14.0
+12.6
+12.6
+12.5
+12.5
+12.7
+11.7
+14.3
+13.8
- 0.3
+ 0.1
- 2.3
- 1.4
- 0.4
+ 2.0
+ 3.1
+ 2.7
+ 4.6
+ 5.4
+ 3.2
+ 1.1
+ 1.5
+ 2.6
+. 1.8
- 0.8
- 5.9
GERMAN
MARK
-17.2
-13.6
-13.6
-12.9
-13.0
-13.7
-12.6
-11.9
-11.6
- 1.6
- 0.4
+ 4.2
+ 5.1
+ 5.4
+ 8.0
+ 9.8
+10.4
+11.8
+18.9
+21.9
+19.6
+20.1
+19.1
+16.9
+15.9
+17.0
ITALIAN
LIRA
+ 1.7
+ 0.2
+ 0.2
- 0.2
- 0.6
- 0.4
- 0.2
+ 1.2
+ 1.5
+ 1.1
+ 1.4
- 1.1
- 0.4
- 1.5
- 7.4
- 9.5
-10.8
-13.3
-17.4
-20.7
-13.9
-14.9
- 6.0
-16.6
-14.7
-19.9
CANADIAN
DOLLAR
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
6.6
1.8
1.4
1.6
1.1
1.1
1.3
0.5
0.2
0.1
6.1
4.9
5.7
5.0
3.7
3.3
2.8
2.9
2.1
1.8
1.9
1.8
2.5
3.5
4.1
5.9
JAPANESE
YEN
- 1.2
- 2.2
- 0.9
- 1.9
- 0.9
- 1.6
- 1.9
- 0.5
+ 0.8
+ 0.4
+ 0.6
+10.6
+14.3
+14.2
+22.0
+24.2
+24.5
+23.5
+22.1
+22.7
+22.3
+21.8
+21.3
+17.6
+18.:'
+19.0
TRADE-WEIGHTED AVERAGE APPRECIATION (+)
OR DEPRECIATION (-) OF CURRENCY CONCERNED
VIS-A-VIS 44 OTHER CURRENCIES
(Percent change relative to Base Rates as of May 29, 1970)
AS OF:
(END OF
PERIOD)
U.S.
DOLLAR
1960
1961
1962
1963
1964
1965
1966
1.967
1968
1.969
1970
1971
1972
1973-Jan.
1973-Feb.
1973-Mar.
1973-Apr.
1973-May
1973-June
1973-July
1973-Aug.
1973-Sept.
1973-Oct.
1973-Nov.
1973-Dec.
1974-Jan.
-6.6
-5.9
-3.9
-3.7
-2.8
-2.4
-1.7
0.3
-0.2
-0.4
-1.4
-5.7
-6.1
-6.1
-11.4
-11.2
-11.1
-12.5
-14.2
-14.5
-13.2
-13.7
-13.7
-11.1
-10.5
-8.5
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Federal Reserve Bank of St. Louis
U.K.
POUND
4.3
11.2
11.8
11.7
11.5
12.2
12.5
0.5
- 0.7
0.0
- 0.5
1.4
- 7.6
- 5.6
- 8.5
- 7.6
- 7.0
- 6.1
- 8.6
-12.7
-12.3
-15.3
-14.1
-15.0
-15.0
-14.9
FRENCH
FRANC
GERMAN
MARK
ITALIAN
LIRA
CANADIAN
DOLLAR
11.4
11.6
11.9
11.8
11.9
12.3
11.4
14.7
13.2
- 0.4
0.1
- 0.8
0.4
2.1
5.6
6.4
5.9
8.6
10.5
8.4
5.7
6.3
7.4
5.5
2.5
-3.4
-22.8
-14.8
-14.3
-13.6
-13.7
-13.6
-12.4
-11.2
-11.4
- 1.7
- 0.4
5.6
6.9
7.8
11.1
12.6
13.1
15.1
23.0
25.9
23.2
24.0
22.9
19.9
18.5
18.9
-5.0
-1.7
-1.2
-1.6
-1.9
-0.5
-0.2
1.7
1.4
1.0
1.3
0.6
1.8
1.2
-4.0
-6.2
-7.6
-9.3
-12.2
-15.3
- 9.2
-10.1
-11.2
-12.9
-11.4
-17.7
5.5
1.2
-1.9
-2.1
-1.4
-1.4
-2.0
-0.5
0.2
-0.6
6.1
5.1
6.1
5.6
4.2
3.8
3.3
3.4
2.7
2.4
2.4
2.4
3.0
3.9
4.6
6.2
-
JAPANESE
YEN
-6.5
-8.5
-5.2
-6.2
-3.9
-3.7
-3.3
-1.8
-0.6
-0.4
0.7
11.9
16.6
16.6
24.1
26.0
26.2
25.6
24.4
24.9
24.8
24.0
23.5
19.5
19.8
13.5
OECD Currencies
Comparison of Alternative Methods
of Calculatina Trade-Weighted
Exchange Rate Change of the U.S. Dollar
(Percent Change Since May 29, 1970)
Old Method
Average AppreAverage Appreciation (+) or
ciation (+) or
Depreciation (-)
Depreciation (-)
of Other (OECD)
of the Dollar
Currencies
Against Other
Agains i the
(OEC9) Currencies-I
Revised Method
Effective Appreciation (+) or
Depreciation (-)
of the Dollar
Against Other
(OECD) Currencies
AS OF:
(End of Period)
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
1973
1973
1973
1973
1973
1973
1973
1973
1973
1973
1973
1973
1974
1/
Average of the percentage change in the dollar cost of foreign
+
+
+
+
+
+
+
+
+
+
+
+
+
10.4
17.7
17.3
17.1
19.3
22.0
22.5
20.5
21.3
21.3
17.2
16.1
13.2
-
9.0
14.1
13.8
13.5
15.1
16.5
16.6
15.5
15.9
16.0
13.5
12.8
10.7
9.8
16.1
15.8
15.6
17.4
19.6
19.8
18.3
18.9
18.9
15.5
14.7
12.0
currencies weighted by total trade shares.
2/
Average of the percentage change in the foreign currency cost
of dollars weighted by total trade shares.
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Federal Reserve Bank of St. Louis
All (49) Currencies
Comparison ot Alternative ITethods
of Calculating Trade-Weighted
Exchange Rate Change of the U.S. Dollar
(Percent Change Since May 29, 1970)
Old Method
Average AppreAverage Appreciation (+) or
ciation (+) or
Depreciation (-)
Depreciation (-)
of Other Curof the Dollar
rencies Aoainst
Against OtIpr
T/
the DollarCurrencies-!
Revised Method
Effective Appreciation (+) or
Depreciation (-)
of the Dollar
Against Other
Currencies
AS OF:
(End of Period)
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
1973
1973
1973
1973
1973
1973
1973
1973
1973
1973
1973
1973
1974
1/
Average of the percentage change in the dollar cost of foreign
currencies weighted by total trade shares.
2/
Average of the percentage change in the foreign currency cost
of dollars weighted by total trade shares.
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+5.8
+11.8
+11.5
+11.3
+12.9
+15.0
+15.3
+13.3
+14.4
+14.4
+11.4
+10.7
+8.6
- 3.8
- 8.3
- 8.0
- 7.8
- 8.9
-10.1
-10.1
- 9.3
- 9.3
- 9.4
- 7.6
- 7.1
- 5.5
- 4.8
-10.1
- 9.9
- 9.7
-11.0
-12.7
-12.9
-11.7
-11.9
-12.0
- 9.5
- 8.9
- 6.9
Revision of Method for Calculating Effective
Exchange Rate Changes
I.
Summary
During the negotiations leading to the Smithsonian realignment, OASIA staff developed calculations of "weighted average"
or "effective" exchange rate changes, in which changes in
individual countries' exchange rates were weighted on the
basis of bilateral trade patterns. The method of calculation
utilized produced two alternative measurements of percentage
change: (1) the average appreciation or depreciation of
currencies in the model against the local currency; and
(2) the reciprocal--the average appreciation or depreciation
of the local currency against all other currencies in the
model. This method yielded satisfactory results as long
as the nominal changes in exchanges rates were relatively
small. However, if the nominal changes become large, as
has been the case in recent months, the difference between
the reciprocal measurements cited above also becomes quite
large. The revised method described in this pacer calculates
a single number representing a currency's effective exchange
rate change.
The weighting technique described below takes into account
not only the distribution of total trade among the countries
in the model--as did the earlier version--but also any differences between the geographic distribution of countries' exports
and that of their imports. This approach (which is similar
in many respects to that used by Morgan Guaranty) permits
calculation of a single average exchange rate change for
each country, thereby avoiding the ambiguity inherent in the
earlier version (and in some other models in use outside
Treasury).
In addition to respecification of the estimating equations,
the country coverage in the model has been expanded from 22
OECD countries to a total of 49 countries. These countries
account for about 90 percent of total U.S. trade (as compared
to about 69 percent in the earlier version) and for more than
90 percent of the trade of most other OECD countries. Finally,
the trade data base has been updated from 1970 to 1972.
II.
Country Coverage
The earlier version of the model covered 22 OECD countries.
Estimates of average exchange rate changes against the "world"
were based on highly arbitrary assumptions about "rest of world"
exchange rate changes. In order to provide a more comprehensive
estimate of effective exchange rate changes, the country
coverage has been expanded to include 26 additional countries
as well as the OECD countries (now 23). Selection of the 26
additional countries was based on their share of total world
trade in 1972. This expansion of country coverage not only
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2
reduces the need for arbitrary assumptions about exchange rate
movements for the excluded countries but also allows calculation
of effective exchange rate changes for the major non-industrialized
countries.
As a result of the increase in the number of countries
included in the model, the trade coverage is greatly expanded. Countries now included account, on average, for 94.5
percent of the imports and 93.7 percent of the exports
of OECD countries (1972 trade). The countries included
and the proportion of OECD countries' trade covered are
listed at Attachment A.
Trade Weights
III.
The trade weights have been updated to utilize the 1972
bilateral trade data reported in the International Monetary
Fund publication, Direction of Trade. The application of
the trade weights is described in the following section.
IV.
Weighting Procedures and Estimating Equations
The model uses three separate weighting steps--based on
import shares, export shares and total trade respectively.
A. Average Exchange Rate Change Based on Import Shares
Of interest is the effect of an exchange rate change on
the average local currency cost of foreign exchange needed for
a country's imports. The equation for calculating this, average
is as follows:
EQ 1:
n
ALCU i/FCU i * Mii /7 Mij
EFFXRMi =
j=1
where:
j=1
EFFXRMi is the average local currency cost of
foreign exchange.
ALCUi/FCLI. is the percent change in the local
currency cost of foreign currency j.
Mii/E Mij is the proportion of country i's
j=1
total imports purchased from country j.
B.
Average Exchange Rate Change Based on Export Shares
The obverse of Equation 1 is the effect of an exchange
rate change on the average foreign exchange cost of the
local currency needed by foreigners to pay for their imports
from the country concerned. The equation for calculating
this average is as follows:
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3
EQ 2:
EFF:uu.=
j=1
where:
AFCU ./LCU
7
* X
/z X
ij
ij
j=1
EFFXRX. is the average foreign currency cost of
local currency i.
AFCUi/LCU i is the percent change in the foreign
currency (j) cost of local currency.
Xij/ E x ij is the proportion of country i's
j=1
total exports sold to country j.
C.
Average Exchange Rate Change Based on Overall Trade Shares
In the earlier version of the model, estimates were obtained
by measuring the change in the local currency cost of foreign
currencies, weighting each individual change by the foreign
country's share of the total trade of the "home" country, and
averaging the results. This yielded a weighted average appreciation or depreciation of all other currencies in the model
against the currency concerned. The reciprocal of this is
the change in the foreign currency cost of the local currency,
weighted and averaged in the same way. This alternative yielded
an estimate of the effective appreciation or depreciation of
the currency concerned against all other currencies in the
model.
This approach did not raise major difficulties so long
as the percentage changes in exchange rates were relatively
small. However, the greater the exchange rate change the
greater is the difference between the reciprocal measurements and
the ambiguity inherent in this formulation.
In addition, this technique utilized total trade shares
for weights, regardlesc of which measurement of exchange rate
change was used. It SealRed preferable to calculate the import
and export averages separately, using the appropriate measure
of exchange rate change in each case, and to combine these two
averages in a subsequent step to obtain a single estimate of
the overall effective exchange rate change.
In order to combine the import and export calculations
and to overdome the reciprocal problem, the following equation
is utilized in the revised model for estimating the overall
effective exchange rate change:
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4
EQ 3:
EFFXRi = [ (
.L,
7= 1
[ALCU./FCU. * M../.
13 3.1 M..]
13 * - 1) *
3
M./M.+X.]
+
[(
[AFCU./LCU . * X ../
j=1
X j) *
ij j=1 ij
Xi
M.+X
where:
i]
Mi/Mi+X i is country i's imports as a percent of
its total trade.
is country i's exports as a percent of
its total trade.
This equation weights the import effect (Equation 1) and
the export effect (Equation 2) according to the size of a
country's imports and exports respectively in relation to its
total trade, and combines the two to produce a single figure
for effective change.
V.
Model Capabilities
The model is constructed so that an effective exchange
rate change can be estimated for any desired time period
and against any base date. The model also has a subroutine
for calculating effective changes on the basis of par value
changes relative to the SDR (in percentage terms) rather
than changes in actual market rates.
Up to eight separate country groupings can be specified
in each run in addition to the entire 49 country grouping,
e.g. effective exchange rate change against the OECD, against
the EC, against the G-10, etc.
The model has several option statements which control
the output of each run. Generally, tables are printed
showing the nominal and effective exchange rate change for
each of the countries specified. Trade shares and values
can also be printed at the user's option. A separate
memorandum covering the program documentation provides a
complete description of the options available and the
specification of country inclusion.
Attachment B lists effective exchange rate changes for
each country against all of the remaining 48 countries covered,
and, for the OECD countries, changes against that smaller group,
over the period May 1970 to January 31, 1974.
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Federal Reserve Bank of St. Louis
L. Britt Swofford
Treasury/OASIA
Office of International
Monetary Affairs
February 12, 1974
ATTACHMENT A
COUNTRY COVERAGE IN THE REVISED
EFFECTIVE EXCHANGE RATE MODEL
OECD Countries
Other Countries
United States
United Kingdom
Austria
Belgium-Lux
Denmark
France
Germany
Italy
Netherlands
Norway
Sweden
Switzerland
Canada
Japan
Finland
Greece
Iceland
Ireland
Portugal
Spain
Turkey
Australia
New Zealand
Yugoslavia
South Africa
Argentina
Brazil
Chile
Mexico
Peru
Egypt
Iran
Iraq
Israel
Kuwait
Saudi Arabia
Taiwan
Hong Kong
India
Indonesia
Korea
Malaysia
Pakistan
Philippines
Singapore
Thailand
Libya
Nigeria
Zambia
Rest of World
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Federal Reserve Bank of St. Louis
ATTACHMENT A
Trade Coverage in the Revised
Effective Exchann.e Rate Model
(percent)
Percent
of
Imports
Percent
of
Exports
U.S.
U.K.
90.4
93.1
89.0
90.6
Austria
Bel-Lux
98.0
95.2
-97.4
96.4
Denmark
France
96.4
90.0
92.8
84.4
Germany
Italy
95.2
94.2
94.3
92.7
Netherlands
Norway
96.1
96.5
94.4
94.1
Sweden
Switzerland
95.6
93.3
95.9
95.7
Canada
Japan
95.1
93.4
97.3
90.8
Finland
Greece
97.3
98.6
98.2
92.4
Iceland
Ireland
96.3
97.0
99.0
98.8
Portugal
Spain
82.3
91.2
79.5
87.6
Turkey
Australia
93.6
98.0
92.9
99.7
New Zealand
88.5
87.7
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Federal Reserve Bank of St. Louis
ATTACHMENT B
TRADE-WEIGHTED AVERAGE APPRECIATION (+) OR
DEPRECIATION (-) OF CURRENCY CONCERNED
VIS-A-VIS OTHER CURRENCIES
FROM MAY 29, 1970 TO JANUARY 31, 1974
Country
United States
United Kingdom
Austria
Belgium-Lux
Denmark
France
Germany
Italy
Netherlands
Norway
Sweden
Switzerland
Canada
Japan
Finland
Greece
Iceland
Ireland
Portugal
Spain
Turkey
Australia
New Zealand
Yugoslavia
South Africa
Argentina
Brazil
Chile
Mexico
Peru
Egypt
Iran
Iraq
Israel
Kuwait
Saudi Arabia
Taiwan
Hong Kong
India
Indonesia
Korea
Malaysia
Pakistan
Philippines
Singapore
Thailand
Libya
Nigeria
Zambia
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Federal Reserve Bank of St. Louis
Against All
Currencies
-6.94
-13.95
10.26
2.88
4.20
-2.44
20.12
-16.16
9.93
10.11
-1.01
18.20
6.50
14.83
0.85
-3.32
1.28
-6.89
0.46
13.60
-62.06
21.95
14.28
-33.22
0.15
-29.28
-35.77
-184.91
-2.28
-15.95
2.85
0.55
16.74
-26.24
12.98
17.19
-3.38
13.02
-17.13
-22.74
-38.00
14.01
-87.43
-19.38
10.84
-9.55
12.13
-69.20
6.40
Against OECD
Currencies
-12.04
-17.99
7.60
0.97
2.38
-5.86
16.97
-19.92
7.34
8.60
-3.32
15.48
5.85
11.95
-0.46
-5.20
0.26
-7.16
-1.93
11.01
-63.29
19.52
13.35
Tradc-Weightell Averacm Appreciation (+)
or
iatiori-71-) of th2 U. S.
(Percent change relative to base rates as ot
May 29, 1970)
As of end of period
or date indicated:
Vis-A-Vis OECD
currencies
Dec. 1971
Dec. 1972
Jan. 1973
Feb;. 1973
Mar. 1973
Apr. 1973
-Vay 1973
Jun. 1973
Jul. 1973 2/
Aug. 1973
Sen. 1973
Oct. 1973
Nov. 1973
Dec. 1973
Jan. 1974
F'4). 1974
- 8.2
- 9.4
- 9.0
-16.1
-15.8
-15.6
-17.4
-19.6
-19.8
-18.3
-18.6
-18.9
-15.5
-14.7
-12.0
-15.0
Mar. 1974
April 4, 1974
April 11, 1974
April 18, 1974
April 25, 1974
-17,3
-16.9
-16.6
-17.1
-17.7
Vis-A-Vis
world 1/
- 5.7
- 6.1
- 6.1
-11.4
-11.2
-11.1
-12.5
-14.2
-14.5
-13.2
-13.7
-13.7
-11.1
-10.5
- 8.5
- 9.0
-10.7
-10.4
-10.2
-10.5
-11.0
Percent Change As of April 25, 1974
Since:
May 29, 1970 (Pre-Canadian Float)
Smithsonian
February 1973 Realignment
March 20, 1973 (Post EC Float)
April 18, 1974
-17.74
- 8.09
- 1.55
- 1.50
- 0.65
J_n // Against t -13 curr6Taes of 43 coun
tries which
approirately 90'ii of U.S. total trade.
2/ On jiuly 6, 1973, t
-10.96
N.A.
- 0.94
- 1.37
- 0.44
27ount for
dollar rc- ched itc lowct ;_vel of
effective
cipreciation during the Ir,asurement
NL- :.- ;11red again
the
1iy 29, 1970 bale rats, the cffectiv
e (actpreciion was 20.L:1 -T;
vis--vis the OECD.
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Federal Reserve Bank of St. Louis
.AVFP;'‘rw tPPP CPTTON
(-;
or Denr,cio.rion
. of Currcincy
VIS-A-VIS OT= GErD CUaRENCIES
(Percent chanc relative to base rates as of May 29, 1970)
......••••••••••••••••••...F
•••••••••••••••••••••••••••••••••••••••••••
•••••••
U.S.
Dollpr
Canadian
Do11,-ir
French
Frinc
German
Mark
Italian
Ljrn
Japanese
Yen
1.1
- 0.4
- 1.5
- 7.4
- 9.5
-10.3
-13..3
-17.4
-20.8
-13.9
-1 5.0
-16.3
-16.8
-14.3
-19.9
-21.3
-20.1
-23.0
+10.6
+1 4.3
+14.2
+92.2
+24.2
+94.5
+23.5
+99.0
+22.7
+22.8
+21.8
+91.1
+17.4
+1 8.0
+19.1
+15.1
+19.4
+18.6
Pound
of cf.:6 of
dc,te
peroc:
indicated.
Dec 1971
Dc 1972 .
Jan 1 973
Feb 1973
Mar 1373
Apr 1973
May 1973
Jun
Jul 1973
.Aug 1973
Sap 1973
Oct 1973
l'ov 1973
Dec 1973
Jan 1974
Feb 1974
Mar 1 974
April 25, 1974
_ 0
- 9.4
- 9.8
-16.1
•3
-15.
-1 5.6
-17.4
-19.6
-19.8
-18.3
-18.6
-13.9
-15.5
+5.2
+5.7
+5.1
+3.7
,
+2.3
+%.9
+1.8
+1.9
+1.3
+2.4
+3.5
n
-1 2.0
-15.0
-1 7.3
-17.7
0
+7.3
+5.3
+7.5
-9.2
-1.4
-0.4
+2.2
+3.1
+2.7
+4.6
+5.4
+3.2
+1.1
+1.5
+2.5
+1.7
-0.4
-5.9
-3.1
-5.7
-8.4
+ t,0
+ 5.1
+ 5.4
+ 8.9
+ 9.7
+10.3
+11.8
+19.0
+21.7
+19.4
+90.0
+18.0
+16.8
+1 5,6
+17.0
+18.0
+205
+22.9
- . 9.9
- 9.1
-12.4
-11.5
- 1 0.7
-10.6
-13.3
-13.2
-17.1
-19.3
-19;1
-18.9
-18.0
-19.1
-17.8
-17.7
Percent Change As Of April 25, 1974
Since:
Smithsonian
Feb. 1973
Realignment
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Federal Reserve Bank of St. Louis
- 8.09
+2.60
-7.04
+18.16
-22.63
+ 5.89
-18.58
- 1.55
+3.73
-10.41
+14.46
-15.30
- 3.44
- 4.59
TO:
.4essrs. Volcker, Hennessy, Bennett,
Willis, Widman, Cross, Lederer,
Schotta and Ranson
FROM:
February 8, 1973
Thomas D. Willett"
1 thought you might find of-interest the
attached comments by Gottftied liaberman,
Pitt, Laffer's recent_ article in the Wall Street
Jburnal.
Attachment
OASIA:RESEARCH:TDWillett:MGJ
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Federal Reserve Bank of St. Louis
2/8/73
Removal Notice
The item(s) identified below have been removed in accordance with FRASER's policy on handling
sensitive information in digitization projects due to copyright protections.
Citation Information
Document Type: Book excerpt
Citations:
Number of Pages Removed: 2
Haberler, Gottfried. "Comments on A. Laffer's Paper" in The Economics of Common
Currencies (London: Allan & Unwin, 1973).
Federal Reserve Bank of St. Louis
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Federal Reserve Bank of St. Louis
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OPTIONAL, FORM NO. 10
MAY 11A2• WrT"'"_••i
GSA Prrtors (st cp.'s) tot-tt.st
UNITED STATES GOVERNMENT
carituictitu,ain
e-4
1/*
TO
:
(Through:
-t
//1,
,
t
Deputy Assistant Secretary Willett
Charles Schotta)
FOR INFORMATION
DATE:
January 31, 197:
FP.011
Sung ..E...4ack and David 'Coe
SUBJECT:
Relation of U.S. Global Trade Balance to the Global Balanceo
of Major Foreign Countries: Revision
The Canadian and Japanese data used in the empirical
work reported in the memo of January 11, 1973 was found to
be inconsistent with the balance of payments data frau those
countries. 'This is especially serious in the case of Japan
whose imports on a "customs clearance" basis include foreign,.
military supplies shipped to Japan.
We have, therefore, re-estimated the equations and given
them in Table 1. The notable change in our finding is that
the importance of Canada's trade balance as an explainatory
variable has changed with time. However, the substance of
our findings is unchanged; we summarize the findings below:
1. The global balances of the U.S., Canada, Japan and
West Germany are offsetting in the sense that one can improve
its balance only at the expense of the others.
2. Canada's global balance does not appear to significantly
affect the U.S. global balance. We treat this finding tentatively because of multicollinearity between the foreign global
balances.
3. Changes in Japan's global balance have the largest
negative impact on the U.S. balance.
The magnitude of each coefficient indicates the change
in the U.S. global balance resulting from a change in a foreign
global balance, when the remaining foreign global balances are
constant. It is, however, extremely unlikely that the underlying cetcris paribus assumption is valid.
Solely to illustrate the importance of interactions of
foreign global balances on the U.S. global balance, we have
constructed a very naive three equation recursive model where
Japan's global balance is the only exogenous variable. The
estinatcd equations of the model are attached in Table 2.
Using the model we find that one billion dollar deterioration
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Federal Reserve Bank of St. Louis
-2in Japan's global balance will improve the U.S. global balance
by 0.974 billion dollars. This figure differs from an improvement of 0.817 billion dollars obtained with the ceteris paribus'
assumption. We note, however, that the difference between the
two values is marginally significant. This is due to the incomplete specifications of the model, indicating the need of furthe
intensive work.
The relationship between the U.S. and foreign global
balances estimates for 60:1-71:4 is typical and is shown in
Figure 1. We know from Table 1 that the standard error of
estimates is 1.648 billion dollars. If the sum of Canada,
Japan and West Germany's global balance is a 17.0 billion dollar
surplus in 1972 and if we use a 2.0 standard error criteria,
then the U.S. global balance will be a 6.1 billion dollar
deficit. For the case in which the sum of the foreign global
balances is zero, the U.S. global balance is expected to be
a surplus from 3.5 to 8 billion.dollars.
Attachments including data set
CC:
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Federal Reserve Bank of St. Louis
Messrs. Widman, Cline
TABLE 1
United States Trade Balance Equations
SEE
. DW
SSR
Sample Period 1960:1 to 71:4'
A.
+ BALw Y"
BALus = 6.189 - 0.529* (BALcA + BALjp
14)
(10.
(16.96)
6.684
1.646
1.51.4
124.9
EALjp - 0.359* BALWG
BALus =* 5.907 + 0.008* BALcA - 0.818*
(1.93)
)
(6.05
2)
(0.0
(14.19)
0.706
1.590
1.809
111.3
6.712
1.573
1-806
111:3
.+ BALwG)
BALus = 6.341 - 0.546*'(BALcA + BAL.11
1)
(14.16) (9.3
0.687
1.700
1.588
109.8
* BALjp - 0.372* BAL.NG
BALus = 6.053 + 0.020* BALcA - 0.847
(1.93)
)
(5.88
5)
(0.0
(12.68)
0.712
1.632
J.911
95.8
- 0.720
1.610
1.902
95.9
BALjp + BALwG)
BALus = 5.864 - 0.433* (BALcA +
(15.70) (6.68)
0.504
1.568
1.500
103.3
0.584* BALjp - 0.416* BALwG
BALus = 5.856 - 0.141* BALE; (2.19)
)
(2.96
(13.90) (0.36)
0.489
1.591
1.657
101.3
0.440* BALWG
BALus = 5.869 - 0.617* BALjp (2.48)
(14.14) (3.56)
0.500
1.574
1.748
101.6
)
BALus = 6.111 - 0.525* (BALcA + BALjp + BALwG
(15.47) (6.45)
0.510
1.551
1.639
91.4
* BALjp - 0.342* BALwG
BALus = 5.988 - 0.995* BALcA - 0.596
(1.79)
(3.04)
(14.16) (1.69)
0.500
1.567
1.548
88.4
BALus = 5.946 - 0.694* BALjp - 0.459* BALWG
(2.52)
(13.75) (3.62)
0.476
1.605
1.739
95.3
BALus = 5
(1
B.
) BALjp - 0.357* EALNG
-7*
(2.08)
r7) (
Sample Period 1962:1 to 71:4
3* BALjp - 0.368* BALWG
BALuS = 6.053 - 0.84
(2.07)
(12.86) (6.63)
C.
D.
Sample Period 1960:1 to 70:4
Sample Period 1960:1 to 69:4
Notes: 1
an),
k,k = US (U.S.), CA (Canada), JP (Jap
RALk = Global trade balance of country
s.
Rate
al
Annu
$,
U.S.
ny), Bil of
and WG (West Germa
dom,
-2
nce esplained corrected for degrees of free
2. 'R Stands for the percentage of varia
c, and
isti
stat
tson
n-Wa
Durbi
the
is
DW
,
SEE is the standard error of the estimate
SSR is the sum of squared residuals.
3.
Figures in 0 are T-ratios.
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TABLE 2
Illustrative Global Balance Model
Sample Period 1960:1 to 71:4
2
SEE
BALcA = 0.259 + 0.258* BALjp
(2.01) (6.35)
0.456
0.700
0.720
22.6
BALwG = 1.519 + 0.258* BAL
+ 0.707* BAL
JP
CA
(6.21) (2.55)
(2.64)
0.464
1.273
0.733
73.0
BA us = 5.906 - 0.817* BALjp - 0.357* BALwG
(14.37) (6.90)
(2.08)
L
0.712
1.573
1.806 111.3
BAL US =
-[.8l7 + ( (-0.357)*(0.258) ) + ( (-0.357)*(0.707)*(0.258)
= -0.974* BAL
JP
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Federal Reserve Bank of St. Louis
DW
* BALjp
SSR
TABLE 3
Data Used in Estimation of U.6.
Trade Balance Equatris
U.S. Global
Trade Balance
Global Trade Balances of Major Countries
Sim
Canada
Japan West Germany
Total
Global Balances
(t)
(2)'*(3)+(4)4.(5)
3.380
2.933
5.308
4.606
0.767
0.949
1.970
2.515
2.571
1.739
8.688
2.713
1960:1
1
3
4
.3.316
4.780
4.712
6.816
0.885
0.135
1,834
2.611
-0.181
-0.768
0.337
0.000
-0.252
0.064
0.396
0.860
1.318
.0.838
1.101
1.751
4.201
4.915
6.546
9.427
1961:1
2
3
4
6.632
6.024
4.128
5.568
1.315
0.703
1.567
1,433
0.024
-0.125
0.535
0.232
-0.580
-0.892
-0.692
-0.068
1.871
1.720
1.724
1.270
7.947
6.727
5.695
7.001
1962:1
2
3
4
4.444
5.692
3.940
4.160
0.078
0.882
2.088
2.702
0.008
-0.149
0.27/
0.528
-0.548
0.092
0.848
1.224
0.615
0.939
0.969
0.950
4.522
6.574
6.036
6,862
1963:1
2
3
4
4.320
6.136
3.788
6.720
0.557
1.076
1.844
3.780
0.275
0.275
0.55%
0.757
-0.468
-0.384
0.016
0.168
0.750
1.186
1.269
2.856
4.877
7.212
5.632
10.500
1964:1
2
3
4
7.368
7.052
5.288
7.616
1.302
2.317
2.985
3.624
0.130
0.555
1.316
0.596
-1.232
-0.228
0.980
1.988
2.405
1.986
0.688
1.040
8.670
9.365
8.273
11.240
1965:1
2
3
4
4.136
6.384
3.540
5.708
1.704
1.458
2.756
3.333
-0.149
-0.100
0.600
0.086
0.748
1.604
2.608
2.644
1.104
-0.046
-0.453
0.604
5.840
7.842
6.296
9.041
1966:1
2
3
4
4,848
4.624
1.952
4.284
2.360
2.988
5.857
6.706
0.037
-0.182
0.829
o.140
1.480
1.796
2.764
3.060
0.843
1.374
2.264
3.498
7.208
7.612
7.809
10.990
1967:1
2
3
4
4.152
5.592
3.192
2.500
5.392
5.249
5.964
7.050
0.426
0.104
0.372
1.201
0.608
0.684
1.800
1.548
4.358
4.461
3.792
4.301
9.544
10.841
9.156
9.550
1968:1
2
3
4
1.044
1.752
-0.688
0.388
5.788
7.077
9.267
11.508
0.969
1.454
1.722
0.962
0.472
2.184
3.380
4.080
4.347
3.439
4.164
6.466
6.832
9.828
8.519
11.896
1969:1
2
3
4
0.512
0.524
-0.824
2.428
5.853
7.878
9.102
11.037
0.856
0.301
0.830
1.078
2.240
3.652
4.268
4.636
2.757
3.925
4.003
5.322
6.365
8.402
8.278
13.465.
1970:1
2
3
4
2.636
4.012
0.640
1.152
7.781
9.391
11.905
15.161
2.256
2.307
2.788
3.829
2.316
3.380
4.420
5.736
3.209
3.705
4.697
5.596
10.417
13.403
12.545
16.313
1971:1
2
3
4
1.500
-3.112
-4.308
-5.236
10.899
12.771
17.814
17.006
1.646
2.145
2.363
1.776
4.220
6.992
9.956
9.980
4.033
3.634
5.495
5.250
12.799
9.659
13.503
11.770
Mean (60:1-71:4)
Standard Deviation
Notes:
(4)
(5)
(6) r= (1)+(2)
1.
All figures are in billions of U.S. dollars, at annual rates; a negative figure
represents a deficit.
2.
All data is f.o.b. except for West German imports which are c.i.f. (as reported in
their balance of payments statistics).
SOURCES:
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Federal Reserve Bank of St. Louis
(3)
United States, Survex of Current Business, BOP Table 2.
Canada, Bank of Canaua Review ara-d-671I 67 Canada Statistical Summary, Balance of
International Payments
Japan, Balance of Payments Monthly and Balance of Payments of Japan, Summary Table.
West Germany, Montnly PrIport of the Deutsche Bundesbank, Supplement J3.
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Federal Reserve Bank of St. Louis
FIGURE 1
(y-tAti — id/
ORYION&L FORM NO. 10
11 /r DITION
MAY ,
GSA 11'14414 (41 cm) lot-sus
UNITED STATES GOVERNMENT
MCMorandum
TO
:
Deputy Assistant Secretary Willett
FROM
Hang-Sheng Cheng
SUBJECT:
Exodus of U.S. Companies:
Burke-Hartke Bill?
DATE:
January 29, 1973
A Likely Result of the
The question was asked if U.< companies could
not avoid the increased tax burden on their foreignsource incomes imposed by the Burke-Harke bill, by
becoming incorporated abroad instead of in the U.S.
After consultations with tax experts in the
Treury, the answer obtained is as follows:
(a) The "exodus" of U.S. companies in the
sense described above is unlikely to occur, because
U.S. incorporation is valuable to U.S. companies,
and because there exist less costly ways of avoiding Burke-Hartke without their having to relinquish
U.S. incorporation.
(b) For companies with U.S. earnings, a far
method would be through a "spinattractive
more
on," to be described below.
reorganizati
off
However, even in this case, the company would incur
a tax on the accumulated earnings retained abroad,
which in certain cases might be large enough to
be a significant deterrent to such an operation.
(c) Various other methods might be employed
to avoid the effect of the Burke-flartke bill, But,
they appear to be either of limited applicability
or involving undesirable features.
(d) In short, companies should be - able to
find ways to circumvent the rurke-Hartkc without
giving up their U.S. incorporation. The extent
to which they would be able to get around Burkeflartke and the method used should vary according
to the specific circumstances.
I would like to record that the following
analysis relies heavily on the expert knowledge on
the subject of :Ir. Thomas Bissell of the Treasury
General Councel's office. However, he wishes to
take neither credit nor blame for the final version
that appears below.
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Federal Reserve Bank of St. Louis
J-3.11.Y
r 13:;n.Li RcLulail.y an Ibe
r_
- 2 A number of possible methods for U.S. companies to
circumvent the Burke-Hartke bill are described in the
following. They are for illustrative purposes, not
meant to be exhaustive.
(1) Dissolution and Reincorporation Abroad of the
U.S. Company. In this case, the U.S. company would
transfer all its assets -- including U.S. operating assets
and stock of foreign subsidiaries -- to a foreign corporation located in a tax-haven country, and issues shares
in the new foreign corporation to its shareholders in
exchange for their shares in the U.S. company. The company's
present shareholders would thus become shareholders in the
new foreign corporation. The company would conduct its
U.S. operations in the form of a U.S. branch, while the
foreign subsidiaries would continue to exist as separate
corporations owned by the new foreign corporation.
If the U.S. company which contemplates such a
reincorporation is widely held by a number of shareholders,
its foreign subsidiaries would not be classified as a
"controlled foreign corporation" after the reincorporation,
so that U.S. tax on the earnings of the foreign subsidiaries
would continue to be deferred until remitted to the United
States as dividends. This is because a "controlled foreign
corporatic-i" is defined in the Burke-Hartke bill as a foreign
corporation in which more than 50 percent of the voting power
is owned by U.S. shareholders each owning more than 10 percent
of the foreign corporation.*
* Thus, a foreign corporation that is owned by 11 U.S. shareholders each owning 9 percent of the voting power of the
foreign corporation would not be a "controlled foreign corporation." However, if five U.S. shareholders each own 11
percent, it would be considered as a "controlled foreign
corporation. In determining a U.S. shareholder's percentage
ownership in a foreign corporation, indirect ownership rules
are applied where there are intervening for.2ign corporations.
Thus, where stock in a foreign corporation is indirectly held
by U.S. shareholders through a foreign company, the stock in
the second-tier foreign subsidiary is deemed as owned proportionately by the U.S. shareholders.
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Federal Reserve Bank of St. Louis
.... 3 ....
The U.S. income tax treatment of the new foreign
corporation and its U.S. shareholders after the
reincorporation
described above would be substantially the same
as if is at
present. The U.S. operations, which would there
after be
conducted as a U.S. branch of a foreign corporatio
n, would
continue to be taxed at the regular corporate incom
e tax rates.
Since the United States does not impose a tax
on profits remitted
by a U.S. branch of a foreign corporation to
its home office
abroad, after-tax profits could be remitted
to the tax haven
free of withholding tax. Presumably the tax
haven would
impose no profits tax on the new foreign corpo
ration and no
withholding tax on dividends, with the resul
t that such
profits could be distributed to the U.S. share
holders without a
further tax on the corporation. The U.S. share
holders would
then be taxed by the United States on the divid
ends at the
rates applicable to each of them, as at prese
nt. Since the
provisions of the Burke-Hartke bill would
not apply, any
U.S. corporate shareholder in the new foreign
corporation which
indirectly owned at least 5 percent of the stock
of any
foreign operating subsidiary, would be entit
led to a deemedpaid foreign tax credit under the Internal Reven
ue Code with
respect to its pro rata share of the foreign
taxes paid by
such foreign subsidiaries.
In order for the reorganization to be accom
plished,
however, the Internal Revenue Service would
have to give
its advance approval. Under present I.R.S
. practice, the
U.S. corporation would not be permitted to trans
fer its U.S.
operating assets and the stock of its foreign
subsidiaries
to a new foreign corporation unless it firs
t included in
its income (1) the unrealized gain from certa
in of its
domestic operating assets, such as inventory,
accounts
receivable, and U.S. patents, and (2) the unrea
lized gain
on the stock of its foreign subsidiaries. To
the extent that
a foreign subsidiary had undistributed earnings,
the capital
gain on the stock would be taxed to the U.S. compa
ny as a
dividend on which the U.S. company would be entit
led to a
foreign tax credit for foreign taxes paid in previ
ous years,
provided the company acted before the Burke-Hart
ke bill became
law. Depending on the particular facts, therefore,
a U.S.
company might feel that the taxes which would have
to be
paid currently were too large relative to the expec
ted future
tax savings to be realized from the operation.
Moreover, there might also be serious business objec
tions
to reincorporating a U.S. company abroad. The
United States
might change its tax laws to impose a withl
'olding tax on
profits remitted abroad by a U.S. branch.
The foreign tax
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Federal Reserve Bank of St. Louis
haven might in some future year impose an income tax and
dividend-withholding tax on the new foreign corporation,
and even attempt to expropriate some or all of the property
of the corporation or impose serious restrictions on
operating in the particular foreign country. There would
also be substantial problems involving the interest
equalization tax which would affect the value of the
company's outstanding stock and might hinder future
flotations of stock_and bonds in the United States.
(2) Retaining U.S. incorporation of the U.S. parent,
but relinquishing control of foreign subsidiaries.
A U.S. company which wished to maintain its U.S.
incorporation but nevertheless circumvent the provisions
of the Burke-Hartke bill could "de-control" its foreign
subsidiaries in one of several ways so that the subsidiaries
would not be considered as "controlled foreign corporations"
in the U.S. tax code.
•
(a) "Spin-Off Reorganization" -- The U.S. company could
distribute all the shares in its foreign subsidiaries to
its shareholders, provided that certain I.R.S. rules were
satisfied. With the composition of the shareholders
largely unchanged, the same board of directors could be
elected to operate the foreign subsidiaries.
In order for the stocks of foreign subsidiaries to
be transferred to the U.S. company's shareholders without
a capital gains tax, however, the undistributed earnings
of the foreign subsidiaries would probably first have to
be included in the U.S. company's gross income as a dividend,
before the I.R.S. would approve the distribution. But,
the tax liability in this case should be considerably less
than in theppreceding case. For, first, only the undistributed
earnings of the foreign subsidiaries—not including unrealized
capital gain--would be taxed; and, as in (1) above, a tax
credit could be taken for foreign taxes paid by the foreign
subsidiaries in prior years, provided the company acted
before the Burke-Hartke bill became law. Second, no tax
need to be paid on the company's U.S. asets as in the preceding case. This factor should be especially important if
the company held a large number of U.S. patents.
It should be noted that the I.R.S. has not yet been
requested to rule on this type of case. The above analysis
thus reflects only the I.R.S.' expectation of the rules that
would be applied if such a case arose.
Though conceivable, to what extent the method might be
used is open to question. A U.S. company might have serious
business reasons against using it. For example, the shareholders in the foreign subsidiaries would probably not be
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Federal Reserve Bank of St. Louis
- 5 identical to the shareholders in the U.S. company for
long,
and the foreign subsidiaries would have to be operated
as
separate companies for accounting purposes. The same
interest equalization tax problems mentioned in
(1) above would
also arise with respect to the stock and bond of the forei
gn
subsidiaries.
(b) Dividend Distribution of Stock of Foreign
Subsidiaries --The stock oi foreign subsidiaries
could
be distributed by the U.S. company to its shareholde
rs as
a dividend rather than as a "spin-off" reorganization.
In
this case, the accumulated earnings of the foreign
subsidiaries
would not have to be included in the gross incom
e of the U.S.
company, and no I.R.S. approval would be requi
red. The U.S.
shareholders, however, would be taxed on the divid
end
distribution, if the company had any current or accum
ulated
earnings at the time of the distribution. This
alternative
would, therefore, be attractive only if the U.S.
company had
no current or accumulated earnings at the time
of the dividend
.distribution. Moreover, the same interest equal
ization tax and
other business problems mentioned in 2(a), would also
apply in
this case.
(2c) Diluting the ownership or the control of
foreign
subsidiaries. As noted above, a foreign affil
iate is a
ii-contrOffe-a corporation" only when more than 50% of its votin
g
power are controlled by U.S. nationals. A.
U.S. company could,
therefore, reduce its controlling share to less
than 5n by
issuing additional stocks to foreigners. (Sell
ing off outstanding shares would be an inferior method, as
any capital
gains would be taxed as dividends). The obvio
us disadvantage
of this method is that the company would lose at least
half of
its share in the foreign subsidiary's earnings.
To the extent
economic rent is an important element in these profi
ts, as is
commonly the case in foreign direct investment, the
company
would be most reluctant to do it. Moreover, the compa
ny might
lose managerial control over the foreign subsidiary
, as it
would no longer possess the majority voting power
in the foreign
subsidiary's board of directors.
The method, however, might be attractive to companies
with foreign subsidiaries in countries where local parti
cipation
in the ownership and control would soon be forced
upon the
company in any event, as a result of the surging
economic
nationalism in these countries.
A variant of this method would be to sell to forei
gners
a new class of voting preferred shares of a foreign
subsidiary
with equal voting power as the common stock, but
less shares in
the earnings. For instance, the terms of the new
preferred
stock might be specified such that their foreign
holders
would control 50% of the foreign subsidiary's votin
g power,
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Federal Reserve Bank of St. Louis
- 6 but share only 5% of its earnings. Thus, the company might
be able to remove the foreign subsidiary's status as a
"controlled foreign corporation" under the terms of BurkeHartke, and still retain practically all of its share of
the subsidiary's earnings. In so doing, however, the company
would expose itself to the risk of losing both the managerial
control and its share of earnings to the foreign stockholders
who now possessed the voting power to make changes as they
saw fit. (A separate agreement, formal or informal, with
foreign stockholders to leave control in the parent company's
hands would be of no_avail, as a recent U.S. Tax Court
decision has ruled in a similar case in the "Subpart F subsidary"
area to treat a U.S. company with such an agreement as if it
owned 100% of the voting power of the foreign subsidiary).
In conclusion, various methods exist whereby a U.S.
company could circumvent the provisions of the Burke-Hartke
bill without relinquishing its U.S. incorporation. The
precise method which a U.S. company might adopt would depend
on .the various tax and business considerations suggested above.
cc:
Messrs. Widman, Korp, Bissell, Cutler, Kopits,
Patrick, Shapiro.
OASIA:Research
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Federal Reserve Bank of St. Louis
mah:1/29/73
January 19, 1973
and. 7\11a)vsin of
Join Tilliarlson's Paper on the
::. rforrtance of Objective Indicators
1I,oma
D. 1:fi11ctt
iliii;oncompars tho historical perfonaancc of
12 cljccive ineator3 for 1"- industrial co.untrie9 ovcr
te priora 1?G1-171. The "tot ccnsit4 in secin how
well each indicator sirmals the existence of each 0.3'. G2
(7i71.1ilillrium situations. These diseguilibria were
icie7mtifi, on prinarily subjective c7rounds. The indicators
toted wcre af;
Tn-lic:ator
1.
Cpot exchan7,2 rat:.. A pronium or
6iscount on parity greater than or ei.7,ual to
2.
Forward rates. A premium or difIcount
on rarity (-Treater than or equal to
- er cent.
..)
0.52 ,
3.
Monthly reserve changes. Four or more
or
conFlecutiverreserve in
decreases greater than
1
4.
Annual reserve chanqes. An increase or
a year greater
decrease of
than or equal to (i)
(ii)
5.
21. value of, actual enrl-yr
noscrve
_
. _ . _13.
_lc
•_
a proportion 057 the
nroc,s
Yevol of 1:-1 t7u-:)1.
or (..-er
12
1G.7
Pq
or 1.:-Jow
rl
J-
or belol.,
cr!nt
1.
=
reserv::,
rcx ec
for 11:—
resr.:rvc_.
per
rrr
0%- tf.;
(ii)
C
for
A ratio o.r
G.
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Federal Reserve Bank of St. Louis
•
12
7.
rcr
Prrt rice relative
ui.
mpotitori.; T. orr_!
. than
(.1iffr(:,nt Crum 'e--, uiliifrinm."
P.
\,Th.c>1r13.c,
T,Tholosale rrice7, rr,lative
tr.-) (-..-7A
for all
i1 countrie3
mr-o:c1 th:In
diffor3nt from '7cquiliLrium.
•(7,7- n2lurr
Corv;uc..:,r rrices rclative
to i.n av=- T,:-. for all industrial countries
.7o= t7,7,n
rifferr:rnt from' -7cilirit.11."
10.
11.
12.
Unit L-J-,or ront7:.r
3ative to those
71orc
different from truilihrium.,
•N
r
kJ
3.4
4.8
per
asic 1)alances.= The basic balance as a
i.rcentacie or imnorts greater than or equal to 6.1
per cent.
1:
C
n3..--1110e. The aC:,luElteCi basic
balance as a peroentace of imports greeter
than or ecual to
per cont.
,7`
•
6.1
The signals given by these indicators, i.e., the situations
ienntifIrt. as asguiliLria, were comparcd with a riL.hjectivelv
Octrmin, ct of ”trLo."
anttl the various )17- 0icators ranked accordinr.1 to the prcentage of correct oicTnals
.clave inu the percentage of incorrect siccnal:;.
I.
The
Overall Pcr.Formance of 4-711.4 Indicators
On the whole, I felt that the indicatorn score
wc3.1 in this t._ -t.
conclude that 'there is no
witllrtper:rsrIN-,ne thaL.is nucfjcioritly rrivt
to
t:1: it wel.:.1d J.)e. wiF,o, to arfoipt a mcchaniF‘tic role
1Ton
11)
re ;-1-o
evr-n
,dtor
too :_;.c.nanqc! ratc I,frformanc:: (L. ..,
:
"•:s)
Ly
of Cif:,
"flJjcor,fd,ra
better than that which ,
,.ct-u1111,
,
,
;- '
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Federal Reserve Bank of St. Louis
•
- 3 i11r
Iiimrolf tof_-r:! tit.tracter-, to the irlf-a rr
A fair-IN, Yroci sot rf ol- jr
,ctjvr, criteria
evicAence of thc roo6 for a p:Ir wIlue c
or air; aur.i(Tcrr to nna]vsis aniz: dirlcurlr;ion of thtsuch a cilanrw."(
12)
usino.
II.
C
1
.c•'
-'11
1- rfor:7-1c0 or the Indicators
fourdi ct the best Terfol=noe 71a3
by for‘:,
cTross rosrv2 levels rcllative tc)
thr. ratio of 11,1t r(iIrv , to i. --:7sorts, and unajju!.. :Le 3at:de.
:17,n1rcr,-s relati-ve to in7=ts. This c7roup grnm Pcorrcc:t'
sic-7n7
on t_cl or
of 45 to CO. per cent of th.i
w1f-h v(--,/ few "vronc;"
The wort performances w(-1- given by dorestic co7./pric
laor costs, an'_1 the vholesale art(-1 conrr
Txric indices. Tlle performance of those domestic varil
was little Letter than random.
In between came spot rates, export prices, cyclically
adjusted basic balances, and the other resorve indicators
(rIonthly an allnual reserve changos, and the ratio of (jro
reserves to imports).
In (-r,neral, i11ison conclus tY.G-it the 3ilicatrs
using net reserves seem to perform rarginally better than
those using gross reserves as inc_lictors of the need for
a(ustnt.
alo notc-; that use of -tle 07n) cyclicl
adjustrrmts for traft bal:Inces worsens the performance of
te baic halance a'.7 an inOicator. ()ur (uantitative
Group Ciic"1 not finc this result surprising, given the t_:rious
mothocaological problem cbaracterizinq the current state of • .
the orcp work on cyclical adjustrent. Our grotty) is continuing work on trying to improve our aLility to make
af2justcnts.
. .
_
!2LYiLB
T
. r to :7(‘ a
7- 7.:r(-,
innin,7 to .1.0 hitstoric:.:1 tcstincT of 0HM,-7,t1v
•
pre
that :115-1 renortotl
L5J-,
•
tested the various objective inclicatc,rs. We cannot tell
priori w:lether changes •in either ar;poct woulC, or wovail not
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Federal Reserve Bank of St. Louis
•
•
e
in the al):;olute
vi(-1(1 F;3(tnificant :',iff2Y-ence3
in. Hr)tors.
or ',-erTorr=Incc. of th:1 various
relrttive
in
ions
ul:.t
alternative for
.c1: ,9
(.1i
1.e
will
:L c.cvitil. Thc tuo aras
in turn.
eet'nr,r2771.rel
A.
rstanard
WillianGon fran;:ly admit, his
rmined, relying heavily
forrIFInce wan sL.jccL:ively dete
1country e7:perts.* In 'y
upon the jurl-rcnt of I
parand
,
brium
Tuili
disec
in.7tances, llowever, cases of
ar
icul
part
a
A
wilic
dnting of the year in
ticularly t.
o
quit
csre
r,
occu
ns to
fuentnl (11F_Ieclnilibrium begi
i
rluitc
1!
ts
oper
cases
6iffieu1t to ;Agnose. In such
the
to
ac
ment
juOg
rconh1v0.3ffer. Another exnerf*'s
t differ a croccl
vigh
n.
iTriu7
ruilil
elise7
bc2t datig lit of
in turn might sicnifihit from i.Alianson's an this
w:Lich ',The various oblcctive
cantly aifct the (1:ciree to.
correct signals.
indicators were judged to give
disequilibrium may be
Furthermore, same cases of
others in ter: of their effect
much nore imnortant than
international monetary tTstem.
on the operation of the
that an indicator which
It might be, for instance,
r disequilibriums and only
cau7ht PO per cent of the majo
would he nore usefua tha;1
20 per cent of the minor ones
of both major and minor
one which caught CO per cant
latter would have a
diseiruilirilzqs, even thouqh the
catching di5c:quilil-,ria.
higher overall average for
way to handle the
It would seem to me that one
dard for judging the nerproblem of determining a stan
d be to have a frank
fornance of the indicators woul
rience by a group of experts
analysis of historical expe
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Federal Reserve Bank of St. Louis
total of.
nornative standard contained a
ce; were
chan
nc rte
62 country year; in which echa
which
in
s
try year
con51re(1 desirable and 92 coun
the 34
Of
d.
should have rellainec.j. unchange
latter occurred. 'Ale frec)-7a cranJ 7 of tile
,7..ljustmcnt to taLo
quent failure of desire,a
irec
nt.7,- of cot.ntrv 7c=r7 of
r,ter of c.i2c):
for a particulr clk;e of
years.
could continue over several
run and cor nor intern7,tiona1
colIntrins. Out of thr?.se could colge a
rarrer
fr=
y
13t7t e countr ve -1 6ivieel. into three catogoric:s-tThore was rathcr genral agreement that
thor;c .f-or
a diseguilibriwat those for v:hich there vas
✓ tirgrneral aczreement/tcre was not ,a
thoL; on wMch export oinion 1771.
•
cor.T !)n r;ulxivi(J,,:: as Cesired into cli.fring
eli-::grec of conensus thiAt there wal or was not a
arou!) could be Ev;ked to
attcot fcrOitinguis7.1 1etwecm najor and minor diseuilnria.
Tif7; proccei= does not, of course, elininate th2
lproblm of differin vim, of whc7;n iiseuilibriu
rlrion, but it woulc:i r;eW to be the :;,ost strair7htforward
wayo . 11(7,1ing tl)c, rroll of Jiffcing
ive
o tain7;.ng as nueil cf7)-af7:ensus as possible on the normat
stan(ls of evaluation.
D.
vc Inelicators
01.-lecti
rclection o: iriag
- r Points_for the
As Williason point,3 out, whot7ler a particulr
s
indicator is triggered at any particular time depcnca
the
on
also
but
tor
indica
the
of
not only on the nature
r roint. rohus, it is
nuriloricl value of its 1-.1important to select a set of triggnr 17)cints for the
ison as.
various indicators which allo; as fair a compar
-Possible.
, on arcazes that "r_lince on is evaluating the
TAlli.arr!
normative
indicators by comparing tilem to a particular
triggors
the
standard, the obvious procL1Curo is to s(Aect
of •
number
as those that would have yieleied the same total
In
recomnded changes as the number in thf_:: standard.
same nu2;cr
this way each inlcator will he trim7r2r6.tho
mancc of
perfor
thu
71re
to.com,
nossile
of ti :1 and it
the diZerent inclicators.'
(1.r).7.7r7 nt
com!larion
Ic.s;T:7.^vr ,-., that the bst r.c.tho
of fft.Liny
I 1)elieve a
t:1:71(7
it
y
over the sample period.
tThonth
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Federal Reserve Bank of St. Louis
stararCt.
(•)re anpropriate
',:t1t1 for
ro
•
done by cletermining trif-7er vnlue
woul(1
inOioatr which maxirlized'its nur of nyt
for
corrr-ci7. nignals_." The total number of adjustments
s1r7na1kld by such raxilaun forecating triggers need not
equal t1)0 number of caseq of "necde..:,' adjustmnt. For
.74. -ju:5tinstanco, a set of trirTgers which signaled only 50 (
ll 50 of those correctly would reccive
rents 1:1.1t call
for eactly thr2
ono which
nan
a b3tt but for ':7hich
totF,1,
in
rts
_
.
jus4
i.
rigt
the G2 car-,es.
of
40
say
in
corroet
signals verct oily
tlat trier vellues for maum
It is alo
foreca7ting 7)f- rformanee woulJ freguently not fall at the
,nna below the norm. A co77,1tment tp
(7;;;.7. r'11;tance
fnctional ytr' in the operation of Vic
not iitply that upper and lower trier points be plac
an cuual dist3non from the norm. .cept in the cases
of res:rve lov2ls and the i=orwas to irnort rtio,
hzwe the upper an:: lower trigger plac
Williamon
oquitant frorl the norm. Ecnce. it would he uful t)
re-estimate values for the trigger for vatious inic. or;
without this symmetry constraint.
P,1tIlough it is r-onsible that the performance of
maximu forecasting triggers would not differ greatly
from Willianson's set, we can only tell by trying them
7-1.
out to
It should also be noted that such rnximum forecating
trin3, while probably thf.! fairest metol of comparing
the relative performance of different irt(aicators, would
performancc-. of the ine7Ar7Jlorr%
tend to overstate the
of the sa10 perioJi.
outside
in general for observations
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Federal Reserve Bank of St. Louis
It shou10. be noted that false starts and failure to
cl)ancTs rlay pot be (-7c.7n0(71 to carry
eor3t2, in which ca3,3 'C':111i=on's criterin
the
1:;111:tracting porvrEle Giccea1 fro co=ct
, nts to
onry woul 7:.!c7t he rl- ro7- riate. Allut7:1.,
of
the to
It vocI
eoAcuptuallv to adjust for the Clogrec to w:iich
ur ftl
7
useflA to
Civen this prol)lcrt it would also 1.c.i:
1ii:7t
. itive thc 17,erfo1manc of tiv,
Li tcri:;
tightning and lootli1tr.
:7“1 to revenA de-grecs of
,
sensitive vms tbeir
of the triqr, rs. TI- e loss
tightening or
proc7resAve
rel2tiv(7 perormance to
confidence
r-reater
lcceninct of tlia trir7c, rs, the
in
performr..nc
relative
cculc:L hav pbout tlici ,th,
v-crc.;
:onsitivo
tha future. IiikowiE,c, the less
proiressivo
J:Is of performance to
olLte 1,-],
trirygers, tile clor
ticjh.tninl a:, A loccninq- of the
would 1.1c2
perforance c,,tsiCi. of the sarmle period
Prrformr.nce which was
- to cry:• to thc 177=i=.1
li1:
inc71cators during the sample period.
achied by -t-:.
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Federal Reserve Bank of St. Louis
OrTONAL. FOAM NO. 10
EnfTiON
IA'
cf4A 4144R (41 4-2;f4) 401-11.4
---L4ITED STATES GOVERNMENT
Memorandum
Mr. William R. Cline
TO
FROM
September 15, ir'72
Lowinger
:
SUBJECT:
DATE:
enger's
Summary and Evaluation of Robert B. Schw
the Impact
of
ent
urem
Meas
"A Conceputal Framework for
of Foreign Trade on Workers"
cc - Mr. Widman
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Federal Reserve Bank of St. Louis
v5iViet,
Synopsis and evaluation of:
Robert B. Schwenger's
"A Conceptual Framework for Measurement of the Impact of
Foreign Trade on Workers" (Graduate School, USDA, April
1971).
Schwenger's paper is critical of studies that purport
to show the overall employment effect of trade. Typically
such a study would come up with a certain figure measuring
the "job producing" effect of U.S. exports and another
figure showing the "job replacing" effect of U.S. competitive imports, and finally come up with a "balance of
In fact such studies
employment" effect of U.S. trade.
would attempt to show whether this balance over time has
"improved" or "worstened".
There is no need to detail much of his criticism of
the "balance of employment" apprOlach both on the technical
level and on the conceptual level.
For example, in such
studies there is often a comparison between the "real"
employment effects of our exports and the hypothetical
effect of our competitive imports on employment.
The kind
of question asked is if $1 billion. worth of U.S. competitive imports were kept out how many jobs would industry
"gain"?
Schwenger argues (rightly) that one has to ask
how are these imports kept out?
If by trade restrictions
(tariff, quotas, etc.) then one has to compare this "gain"
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Federal Reserve Bank of St. Louis
-
-2
to jobs lost due to reduced exports resulting from foreign
retaliation.
Schwenger does take a swing at traditional trade
theory couched in terms of the static gains of trade.
In
essence he says the static allocational benefits from
trade are too small and thus unlikely to impress public
officials (and the public) and therefore they get easily
overshadowed by the more "catchy" employment effects of
trade.
More specifically neoclassical trade theorists failed
to incorporate into their model the existence of:
(1)
the
mixed economy -- or what Galbraith calls the New Industrial
State
where monopolistic elements and concentration of
economic power are prevalent. (2) Elements of dynamic
growth and innovation.
(3) Recognition of an increasingly
economically integrated world, i.e. the interconnection
that exist in present day international economy.
Some credit is given to trade theorists for recent
attempts of incorporating factors such as technology,
innovation and the skill distribution of labor and their
trade effects, in their models.
Again while one can be sympathetic with the inadequacy of neoclassical models and with the frustration of
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Federal Reserve Bank of St. Louis
3
public officials given the "small" gains from trade, and
while they can be accused of multiple sins;
the respon-
sibility for the "balance of employment" concept is not
one of them.
Schwenger's hope seems to be that if trade theorists
and econometricians get busy in constructing more complete
and dynamic models, the "true" gains from trade will come
out to be large and duly impress the public.
Therefore
I was looking with anticipation to the second part of the
paper where Schwenger describes the task in the following
terms:
"A useful Conceptual framework for the measurement
of trade impact must have the generality (the comprehensiveness) of the classical theory
it must embrace the
complexity of variables and inter-relationships understood in systems analysis;
it must include the dynamic
technological developments for whose efficient appreciation trade change is necessary;
it must receive an
obvious relevance to the interests of workers broadly
understood;
dity".
and it must have a publicly Persuasive vali-
An ambitious undertaking in anyone's book!
Yet when Schwenger comes down to specifies, he is
once again measuring only the static costs and benefits
resulting from trade changes.
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Federal Reserve Bank of St. Louis
4
. For example on the side of benefits he would include
increased consumption, lower prices, increased employment,
etc. how are the dynamic effects measured?
What about
the connection between trade and technological change?
What is the nature of the international links he assumes
to be of major importance?
Not much about .these questions
in the paper.
The discussion of the U.S.-Canada Automobile Agreement as an application of this "method" suffers from the
same weaknesses.
He is on safe ground as long as he talks
about the static dfficiency gains from the Agreement.
But
how do you disengage the presumed effects of the trade
expansion on growth of output (or employment)
in the auto-
motive industry from those due to growth of aggregate
demand during the same period?
The problem is that
the "dynamic" benefits, if any, in a period of general
rapid expansion of the economy, cannot be clearly assigned
to the trade expansion that transpired.
No one can
a•
deny that U.S.-Canada trade in automotives has expanded
during 1964-63, but has it led to technological changes,
in the industry? If it did how would it be measured?
No methodology for answering these questions is presented.
He ends with some improvements in the measurement
of costs and benefits of changes in trade flows;
which
is a far cry from the more ambitious purpose of the study.
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Federal Reserve Bank of St. Louis
OPTIOWL t
MAY W./
C5A
t.. /2
,i
-ivp.... p.,.:'71,70r017 c1,I f m
UNITE])
STATES GOvERNNIENT
t?...!
A Utj i (,, i . ., ,,...•, i • ./
: Deputy Assistant :3(:retary Willett
Ciilrough Chal:les Schott
TO
FROM
:
SUBJECT:
Divm
January 11, 1972
Sung Kwack and David Coe,
,(
Relation of U.S. Global Tr ce Balance to the Global Balances
of najor Foreign Countri
We assume that one of the policy goals for a country is
,-ast prevent -4-t-r4-ration in its global balancc of
trade rather than its local balance of trade with a particular
country.
In a world of two countries both are in direct competition
and one can improve its trade position only at the eNpense of
the other. In a multi-country world, however, the global
balance for any one country can be changed only with an equal
change in the total global balance of the remaining countries.
Often we ignore the fact that two countries compete not only
over their local trade balance with each other but also over
their respective local balances in third countries.
The purpose of the exercise reported in this memo is
two-fold:
1. To attempt to forecast the 'global U.S. trade balance
with known values of the global balance of our major trading
partners. This is viewed as a means of checking trade balance
forecasts from a system of U.S. export-,import equations.
2. To examine which trade partner has the most influence
on the U.S. global balance.
On an ad-hoc basis we hypothesize that the U.S. global
balance is a negative function of the global balances of the
three major trading countries (Canada, Japan and West Germany),
specified separately or as a sum. The empirical results are
attached. We note that all of the coefficients are of the
expected sign.
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Federal Reserve Bank of St. Louis
1
'
13 1(4 116"
Evo, U.S. Savings Bonds Replarly cn the Payroll ,V,,,rinp Plan
-2--
Four inter
finings emerge:
•
1. The foll: countries' balances are offsetting in the
sense that one can improve its global balance only at the
cNpcnsc of the oe=s.
balance of Canada. does not appear
2. The glol,al tra.,
to sianificantly influence the U.S. global balance. However,
this finding should be tit:atcd cauLiously, co;isidoring somc
degree of multicollinearity between Canada's, Japan's and
West Germany's global trade balance.
3. The coefficient on Japan's trade balance is highest,
followed by West Germany's. Thus, for equal deteriorations
in the global trade balances of Canada, Japan or West Germany,
the U.S. will benefit most from that of Japan.
4. The findings (1) through (3) appear to be independant
of the sample period.
Attachment
cc:
Messrs. Widman, Cline, Cheng, Lederer, Klock, Hays
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Federal Reserve Bank of St. Louis
United States Trade 1%?1:Ince Equations
fi2
A.
B.
C.
DW
Sample Period 1960:1 to 71:4
BALus = 5.483 - 0.640* (BALch + BALjp + PALwG)
(17.20) (10.02)
0.679
1.662
1.605
127.1
BALUS = 5.009 - 0.236* BALCA - 0.895* BALjp - 0.574* BALWG
(3.19)
(5.91)
(10.76) (0.71)
0.690
1.633
1.918
117.3
BALus = 4.998 - 0.927* BALJP - 0.638* EsALwG
(10.80) (6.47)
(4.13)
0.694
1.624
2.035
118.6
BALus = 5.495 - 0.646* (BALcA + BALjp + BALWG)
(14.31) (9.17)
0.680
1.718
1.664
112.17
BALus = 4.942 - 0.162* BALcA - 0.920* BALjp - 0.534* 1-711.1G
(3.13)
(5.79)
(9.42) (0.45)
0.697
1.674
2.057
100.9
BALus = 4.914 - 0.941* BALjp 4 0.624* BALWG
(3.83)
(9.53) -(6.28)
0.703
1.656
2.141
101.4 .
0.483
1.601
1.493
107.6
0.466
1.627
1.704
105.9
0.472
1.618
1,859
10" '
BALus = 5.416 - 0.625* (BALcA + BALjp + BALWG)
(16.31) (6.06)
0.478
1.601
1.582
97.4
BALWG
BALUS = 5.313 - 0.836* BALcA - 0.664* BALjp - 0.549*
(2.97)
(2.70)
(10.81) (1.42)
0.453
1.640
1.532
96.8
BALus = 5.194 - 0.753* BALjp - 0.664* BALuG
(3.94)
(10.5$) (3.12)
0.438
1.662
1.755
102.2
Sample Period 1962:1 to 71:4
Sample Period 1960:1 to 70:4
0:527* (BALcA + BALjp + BAL )
BALUS ft 5.292 WG
(16.48) (6.42)
BALus = 5.223 - 0.264* RALCA
(10.87) (0.74)
0.645* BAL
(2.75)
p
0.586* BALwG
(3.24)
BALUS = 5.202 - 0.697* BALjp - 0.654* BALWG
(4.21)
(10.90) (3.13)
D.
SEE
Sample Period 1960:1 to 69:4
Notes:
1.
2.
3.
CA (Canada), JP (Japan),
BALk = Global trade balance of country k,k = US (U.S.),
Rates.
Annual
$,
U.S.
of
Bil
Germany),
(West
WG
and
for degrees of freedom,
K2 Stands for the percentage of variance explained corrected
statistic, and
-Watson
Durbin
the
is
DW
estimate,
the
of
error
SEE is the standard
SSR is the sum of squared residuals.
Figures in 0 are T-ratios.
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Federal Reserve Bank of St. Louis
URY .1)E.PAR
C
AE
FOR 11: TE-L-LA 1.11
T
IRS
Diate4g.f.a.
To:
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Federal Reserve Bank of St. Louis
ki••••
19
U.S. Trade - On Censw- Basis
(In
million; seasonall adjusted)
Totals may not add due to rounding.
Exports
34,063.
2,815
2,775
2,439
8,028
1968
Imp_prts
33,226
2,687
2,592
2,588
7,867
April
May
June
Second Quarter
2,855
2,740
2,870
8,465
2,604
2,755
2,792
8,151
July
August
September
Third Quarter
2,858
2,950
3,211
9,019
October
November
December
Fourth Quarter
Exports
37,332-2,163
:
2,266
3,188
7,615
1969
Imports
36,043
2,002
2,672
2,982
7,655
251
-15
78
314
3,318
3,268
3,179
9,765
3,183
3,257
3,152
9,59-I
2,725
2,872
2,951
8,548
133
78
261
471
3,182
3,366
3,341
9,889
3,074
3,163
3,078
9,315
108
204
263
2,631
2,972
2,977
8,581
2,736
2,883
2,908
8,527
-105
89
70
54
3,342
3,398
3,280
10,020
3,192
3,180
3,078
9,450
150
218
202
56-9-
1970
Imports
39,963
3,223
3,278
3,218
9,719
Exports
1971
Imports
Full Year, Total*
January
February
March
First Quarter
Exports
42,662
3,406
3,547
3,376
10,328
3,735
3,690
3,815
11,240
3,686
3,553
3,569
10,809
49
136
246
431
April
May
June
Second Quarter
3,409
3,661
3,730
10,806
3,263
3,338
3,266
9,867
146
323
465
934
3,543
3,758
-215
July
August
September
Third Quarter
3,699
3,592
3,553
10,845
3,255
3,346
3,428
10,02-5
445
246
125
816
October
November
December
Fourth Quarter
3,689
3,499
3,570
10,758
3,501
3,428
3,404
I-07333-
188
71
166
425.
Full Year, Total*
January
February
March
First Quarter
Surplus
837
I-2-8184
-150
161
Surplus
2,699
183
269
158
609
Surplus
--Y,20---
--M-406
206
=-0
136
11
27
-f7-4-
574
Surplus
id to annual totals. -- Seasonally adjusted quarterly fiqures do not
Export
data
include re-exports,
Source: Department of Commerce, FT 900.
and exclude Department of Defense flap-Grant-Aid shipments. Import
data are "general imports" for immediate consumption plus entry
into bonded warehouses.
U.S. TREAS. DEPT.
May 27, 1971
*
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Federal Reserve Bank of St. Louis
^VP
INDICES OF U.S. AND FOREIGN COSTS AND PRICES
Annual
Over
1968
A.
B.
WHOLESALE PRICES, MANUFACTURES:
1. Canada
4.7
2. France
7.3
5.1
3. Germany
3.9
4. Italy
2.8
5. Japan
0.6
6. Netherlands
7. United Kingdom
1.3
4.0
8. Foreign Average 1/
9. U.S. Index
3.5.
UNIT LABOR COSTS/MANUFACTURES 2/
0.51. France
2. Germany
4.0
4.2
3. Italy
4. Japan
2.9
5.4
5. United Kingdom
6. United States
4.0
Over
1969
4.7
-3.2
10.1
6.4
2.8
5.1
7.4
,5.7
3.8
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
Percent Changes
Quarterly
Over
I 70
Over
II 70
0.7
-2.4
4.7
2.2
0.3
2.6
2.2
2.1
1.3
2.1
0.5
1.1
1.4
0.1
0.8
2.5
1.1
0.7
3.1
-0.6
1.1
-0.1
1.0
0
1.7
0.9
0.8
-1.9
3.7
2.9
0
4.2
1.1
3.8
1.8
7.4
2.8
4.0
0.5
0.9
3.5
4.3
4.6
2.3
1.5
Over
IV 69
Over
III "
1/
Eight-country weighted PAIL
adjusted for exchange-rate changes.
Countries are: Belgium, France, Germany, Italy, Japan, Canada,
Ne.therlands, and United Kingdom. Weights are relative amounts of
manufactures exports (to all markets) in previous year. For data
sources, see below.
2/
Not adjusted for exchange rate changes.
n.a. = Not Available.
Sources:
WHOLESALE PRICES, MANUFACTURES: Data for U.S. from Wholesale Prices
and Price Indexes (BLS); all other countries from Main Econolac Int.ilcators
UNIT LABOR (fOSTS. Data for U.S. from Business Conditions Dic;est
(Commerce Dept.); all other countries from (U.K.-1 National Institute
Economic Review (NIESR).
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
U.S. Department of Treasury
May 25, 1971
0.7
0.3
1.1
1.5
2.5
1.7
2.2
1.5
0.5
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
-
:
:Are
C1.11177
r1/4.r
J..traii,:lo by*
*
:
a
'..‘)•;
Lt.ir 4..tt..Lta
':!r
tt,
p,r.r)
,:;14,1tti to 7,r;.-14 taiti -11 ;,,i,11.,0.:,rn on Balar,c1-o-Paytntt;
jectives (PI -2), TrtAnda in U.Z. '.."11,*ncl of Payr%ints
a:12 .11aci,.-: of U..
7 fict.-.1
cc,-..1,1,ote a p4, -at 011 t„„h;t
qui1iriu
kote:It.lai for nostorin5 Pyrt
itlIoUt
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
thure
a.,iti'c ei,,.!:.111t11 of no
.1:2. of
t4 *JV3 ti7,4 :iszu4y of ti
t3
and 17"; LI
,g
of
to the
U.S.
la Ldo
•=
,0/71
fl
e"
:JP:6/7/71
REDUCTION IN TRADE BARRIERS
POTENTIAL FOR EQUILIBRIUM FROM SURPLUS COUNTRIES
In a situation of disequilibrium in international payments,
actions taken by surplus countries to reduce their payments
surplus will generally tend to reduce imbalance and the nressure
on reserves of deficit countries.
The use of measures influencing
the trade account is one possible alternative; others are tai]oring
monetary and fiscal policy to balance of payments needs, restrictinc
capital inflows; promoting service expenditures abroad such as
eNkc.fiart
4-rA-P
A. A
tourism;/N and revaluing the currency.
MEASURES AVAILABLE
Unilateral tariff reductions are one form of reduction in
trade barriers which a surnlus country could undertake.
This
would allow an increase in the value of goods imported, provided
the elasticity of demand for imports is greater than unity for
the products where tariffs are reduced.
One major difficulty in
adopting such measures has been that surplus countries don't
wish to give up rights to reciprocal reductions in tariffs by other,
in a multilateral context.
It is also argued that such a unilatera:
move would ease the impetus toward multilateral negotiations.
As a result the unilateral tariff reductions which have
taken place in recent years have been of the rather limited and
specialized form of advance, rphe Kennedy Round cuts. Cuts
already agreed to and staged over a five year period were
advanced by Switzerland, Austria, and Canada.
has a
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Federal Reserve Bank of St. Louis
This measure
temrorary nature creating an initial'differential which
- 2 is reduced to zero as other nations complete their scheduled
cuts.(Japan has a measure before the Diet to advance the
At this point in time however,
last cut. /Its effect would be negligable). Tubstantial across
the board cuts in tariffs could be very effective in reducing
a surplus.
No surplus country has undertaken such a dramatic
step.
Placing a tax on exports would be another means of reducing
a surplus if the la elasticity of demand was greater than unity.
This would have the undesirable effect of limiting total world
trade and ma7be especially unfeasable politically.
Taxes on
exports are used for the opposite effect in certain LDC's with
exports with low price elasticities of demand.
I eduction in non-tariff barriers would also be very useful.
Germany and gpm Japan at one time maintained substantial quota
systems.
Germany has almost completely removed this barrier
to imports and Japan has made substantial progress.
The removal
of other non-tariff barriers can also have substantial trade effect
Japan maintains a substantial array of non-tariff barriers
including a comprehensive licensing system, a required method
against
transactionsirestrictions
discounting import commercial paper, an restrictions on the es-
of settlement for all import
tablishment of sales and service branches.
In Germany the operation of the EC Common Actricultural
Policy sustains German agricultural production at a level
substantially above efficient operation.
This prevents sunnly
of German agricultural needs by more dfficient producers.
Another trade measure which could be undertaken somewhat
similar in effect to tariff measures would be the removal
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
of border taxes and rebates.
Germany after increasing its border
tax rates inconjunction with the imposition of a TVA in early
1968 suspended a portion of the rates in December 1968 in the face
of a substantial surplus.
the rates were restored to the maximum
however in conjunction with the German revaluation in 1969.
In general the pressures placed on surplus countries to
adjust by any means is much less than those placed on deficit
countries.
With the exception of the U.S. deficit countries are
absolutely constriined by their foreign exchange reserves and
ability to borrow.
Snrolus countries if not suddenly inundated by
Foreign capital can continue to sterilize and accumulate foreign
exchange indefinitely.
The pressure from export industries not
to undertake revaluation can be intense.
If revaluation occured
a large adjustment burden is placed onthem.
There is in addition
a certain tendancy for countries to view a payments surplus and
the accumulation of foreign exchange as desirable and an indication
of sound financial policies.
All these factors make it difficult
to bring pressure to bear on removing0 trade barriers.
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Federal Reserve Bank of St. Louis
11111111.81
OPTIONAL rOpm no. 10
1.4AT lei FDIrICNi
GSA 1.1.1.4/1 (41 cm)101-11.11
UNITED STATES
iVERNMENT
emoran
TO
FROM
I m
Petty, Hennessy, Cates, Willis,
Schaffner, S. Cross, Pelikan, Reynolds (7)
and Watson (5)
Wilson E. Schmidt
:Messrs.
:
DATE:
May 20, 1971
SUBJECT: Balance-of-Payments Charts and Tables
Attached for your use is a set of balance-of-payments
charts dealing with various aspects of our balance of
payments and international competitive position. Each
chart is preceded by a brief note and followed by a tabular presentation of the data. Messrs. Reynolds and Watson
may wish to send copies to our Treasury representatives
overseas.
These materials were prepared in connection with
Secretary Connally's appearance before the Subcommittee
on International Trade of the Senate Finance Committee
on May 17, 1971. Although the Secretary did not hand out
copies of the charts, he made extensive use of them in the
course of his testimony.
Attachment
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Federal Reserve Bank of St. Louis
Buy U.S. Savinp.: Bonds Regvlarly on the Payroll Savings Plan
LIST OF CHARTS
1.- U. S. Basic Balance, Liquidity Balance, and Official
Reserves Transactions Balance.
2.- U. S. Reserve Assets and Liquid Liabilities to Foreigners.
3.
U. S. Current Account and Long Term Capital Balance.
4. - U. S. Government Grants and Credits.
5.- Private Long-Term Capital.
6.'--- Investment Income, Other Services, and Private Transfers
& Government Pensions.
7.- Market Shares in Total Exports of Manufactures.
8.
Composition of U. S. Trade
a.
b.
c.
d.
9.
Consumer Non-durables
Consumer Durables
Auto Products (Excluding Canada)
Capital Goods
Deterioration in U. S. Trade Balance since 1964.
10.- Trends in Export Prices in Selected Countries.
13,„ Trends in Wholesale Price. of Manufactures in Selected
Countries.
I
12.-- Total Compensation Per Hour Worked in Manufacturing
Industry, Selected Countries.
13.-- Trends in Output Per Man-hour in Manufacturing.
14.--"Trends in Wage Costs Per Unit of Output.
15. -Trend Rates of GDP and Service Sector Growth.
16. 'Projected Growth of Output Per Person Employed.
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Federal Reserve Bank of St. Louis
U. S. Basic Balance, Liquidity Balance, and
Official Reserve Transaction Balance
This chart shows that the United States has had a deficit in its basic
balance every year for the last 20 years.
What this means is that the nation
has not received enough from the sales of goods and services and from foreign
investments here to offset the long-term investments made by U.S. industry and
government outside the U. S.
The chart also shows that we have had 20 years of uninterrupted deficits
measured on the liquidity basis.
In eight of the 11 years on which a balance
on the official reserve transaction basis has been calculated we were in deficit
on that measurement as well.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
U.S. BASIC BALANCE LIQUIDITY BALANCE MD
OFFICIAL RESERVE TRANSACTION BALANCE
il.
i
I
Official&sorra
rfaina'Clei017 Ealance----.
I
SURPLUS
+2 _
$81
...,1
2
•
.........
,
:.
/..
Basic
Ramat
0....
...
...,
....
.
•••••••..***
i
/
.
k
‘1
.
/
••••••••••
• Liquidity Balaficsol
,
- DEFICIT
-4
1
V
_
_
..
-6
_8 •
.
.
•
.
•
•
j
51 '52
SOURCE:
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
1
I
J
'54
•
'56
'5
Survey of Current Business.
.
1
1
762
1
-- -
.......
'6U
L
.......
..1
.-
-12
.
Measures of the U.S. Balance of Payments
Basic Balance, Liquidity Balance and
Official Reserve Transactions Balance
($ billions)
•
Basic Balance
Licuiditv Balance
- *
-1.2
-2.2
-1.5
-1.2
Official Reserve
Transactions Ba)ance
•
.n.a.
n.a.
n.a.
.
n.a.
n.a.
1951
1952
1953
1954
1955
-0.6
-1.5
-2.5
-0.9
-1.3
1956
1957
1958
1959
1960
-0.9
-0.2
-3.5
-4.5
-1.4
1961
1962
1963
1964
1965
-0.7
-1.8
-2.1
-0.4
-2.0
-2.4
-2.2
-2.7
-2.8
-1.3
'-1.3
-2.7 •
-2.0
-1.6
-1.3
1966
1967
1968
1969
1970
-2.0
-3.1
-1.7
-2.8 -2.6
-1.4
-3.5
:0.2
.T7.0
-4.7 I/
0.3
-3.4
'1.6
2.7
-10.71/
t
-1,0
0.6
-3.4
.1.3.9
-3.9
,
n.a.
• n.a.
' n.a.
*n.a.
-3.4
n.a. Not available.
Less than $50 million.
Exclude SDR allocation of $867 million.
1/
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
/
4/7/71
U.S. Reserve Assets and Liquid Liabilities to l'oreigners
This chart shows how our reserve assets have declined and our short-term
liabilities to foreigners have risen
until the liabilities are now more than
three times our reserve assets.
Our liabilities to foreign monetary authorities, most of which are included
in the $47 billion figure for total liquid liabilities to foreigners, were
$24.5 billion at the end of 1970.
It is important to note that this chart does not- attemnt to portray the
full international investment position of the United States.
assets--mostly long-term--and long-term liabilities.
held assets abroad
. totalled
$158
We have other
At the end of 1(169, Americans
billion (including the official reserves)
while total foreign official 'And private investments in the United States were
only $91 billion.
This means we have had a favorable net investment nosition
overall (qhort-term and long-term) of roughly $67 billion.
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Federal Reserve Bank of St. Louis
U.S. RESERVE ASSETS AND MID
!ABILITIES TO FOREIGNERS
•
BIL
https://fraser.stlouisfed.org
•t
..
Federal Reserve Bank of St. Louis
S. Liquid Liabilitios,,,
10 411 Foraignors*
v-tk U.S. Liobffilios, Liquid and
Non-liquid, to Foroign Official 4goncin
'54
'56
'58
'Including non-ligail
'60
'62
to foirign
'64
'66
egencs
'68
'10
U. S. RESERVE ASSETS AND LIQUID LIABILITIES
TO FOREIGNERS 1/
(in S billions)
U. S. Liquid
U. S. Liabilities
Liabilities
Liquid & non-liquid
to All
to Forcizn
Foreiulers 1/
Official .4.cncies
U. S.
Reserve
Assets
1950
_ 1951
1952
1953
1934
1955
1956
1957 •
1958
1959
1960
'
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
24.3
24.3
24.7
23.5
23.0
22.8
•
23.7
24.8
22.5
21.5
19.4
•
18.8
•17.2
, 16.8
16.7
15.5
14.9
14.3 i
15.7
17.0
14.5 .
-_
..
•o.st
.•
8.9
8.8
10.4
11.4
12.5
13.5
n.a.
n.a.
n.a.
n.a.
n.a.
n.a,
• 15.3
15.8
16.8
19.4
21.0
• n.a.
n.a.
n.a.
(10.6)
(11.9)
22.9
24.3
26.5
29.5
29.7
(12.6)
(13.8)
(15.4)
(16.7)
(16.8)
31.1
35.8
38.6
46.0
47.1'
N,
,j
N,
Including non-liquid liabilities
'n.a.=Not•available
1/
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
to foreign official agencies
.
(16.0)
(19.3)
(18.5)
(17.1)
t(24.5)
U. S. Current Account and Long-Term Capital Balances
This chart is one of the series designed to show the structure of the U. S.
balance of payments.
it indicates that with minor exceptions the U. S. has
maintained a favorable balance of goods and services.
At the same time we have
experienced sizeable net outflows of long-term capital.
These figures include
the investments made by American firms as well as government loans and grants.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
COMPOSITION OF U.S. BALANCE OF PAYMENTS
U.S. CURRENT ACCOUNT AND LONG-TERM CAPITAL BALANCE
Bil.
+8
1
'1
1
I
I
BALANCE ON CURRENT ACCOUNT---...
(EXCL. GOV'T. GRANTS)
—
•
+4
...,
,.
SURPLUS
•
N.
'
+2
4..
•4
,
0
.t,
,
;
—,
.
.
DEFICIT
-4
-2
.
t
.z41;
-
1
,
st fk......,
‘
y.
ii
1k4:14..,...
I:0001w'
-6
.
I
7
/
I
esp t
• #
4ititi
444.4;*
%
.
—.
4,
4,2 max lc*1
-8
1951
NAI
I
St441t4f
BALANCE ON •''
LONG-TERM CAPITAL
*a
.
4•Ip---
1954
1956
ntinvrv OF CtirIPTNT riustNrnn
SOU;1CF:
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
1958
1960
1962
1964
1966
1968
1970
1972
U.S. Current Account and
Long Term Capital Balance
($ Billions)
•
Balance on
Current Accounts
Excl. Gov't Grants
1951
1952
1953
1954
1955
•
3.3
1.8
-0.1
1.3
1.6
Balance on Long
Term Capital
-3.9
-2.4
-2.3
1956
1957
1958
1959
1960
3.5
5.2
1.6
-0.5
3.5
-5.4
-5.1
-4.0
-4.9
1961
1962
1963
1964
1965
5.0
4.5
5.2
7.8
6.2
-5.7
-6.3
-7.3
-8.2
-8.2
1966
1967
1968
1969
1970
4.4
4.0
1.4
0.8
2.3
-6.4
-7.1
-3.1
-3.6
Source:
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Survey of Current Business
1
5/18/71
U. S. Government Grants and Credits
This chart traces the course of grants and credits extended by the U. S.
Government and the repayments which have been received on government loans.
The level of government grants has diminished slightly in the last four
years, but there has not been a major change since 1952.
EXIM Bank loans have
shown a rapid growth in the last five years while other government credits
have remained relatively constant during this period.
Loan repayments on the
other hand have been rising steadily and are now at a rate of $1.5 billion
annually.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
COMPOSITION OF U.S. BALANCE OF PAYMBITS
U.S. GOV'T. GRANTS AND CREDITS
S Bii.
+2.0
—
,
+1.0 .
.....'
'
•1: 1. 53
gr=s 1=3 Tair
Tr:4 I=
V.r."--
r"z smr. r=
10°III/ alkt,r,z Ittsci 1574
icZa
LOAN REPAYMENTS
0
.
••:•:•:••
-1.0
.•.•.
.
.
•
• •
.....
.
..
GRANTS
.•.•.•.•.......•.•...•
..........
..
...
.......
em.....1
•
,,,,.......,•••••.......
11..........,••••• •
'
_
y..•..m.:.:...:,—......1a4....
s,
-....tin.i........--..z....„4...,..-
,
.1.;...05.1%1
•
-2.0
J
tITi1it,10aei,
,
,
sis
s"4,(.
'"...416.
% /
...",,4
-%.
.sitswe..Y
•
.
-3.0
'
li111111,
#
1
...
.
-
.
I
',its?,
s r,*„ GROSS EXIMBANK LOANS
'0,o#,I
..1
01-10”'
1:41411% 1
,
'III
_
-44)....„
,
-4.0
•c:21..
'
llaZo-tpe 1°1
.
•
1
•
..0,
Itil.
,T.
OTHER NEW GOVT. CREDITS
.‘,..
-1-•4,,,,
•krza..
-.4*.•
.
Om...,
.41.
1:.
-1'...
k
1
milli, ot0
.k.N..
NU.
1
1951
jr
\ir
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
1954
NI ttliniNrr,
1956
1958
1960
1952 .
1964
1966
1968
_
1970
1972
5/12/71
U. S. GOVERNMENT GRANTS AND CREDITS
•
Grants
Total
- 461
XMB
849
705
414
726
_
-
272483
645
185
164
-1733
-1616
-1616
-1633
-1664
-1108
-1617
-1515
-1407
• -1741
-
1962
1962
1963
1964
1965
-1853
-1919
-1917
-1888
.-1808
-2200
-2374
-2648
-2394
-2470
1966
1967
1968
1969
1970
-1910
-1602
-2766
-3425
-3652
-3388
-3307
1951
1952
1953
1954
1955
-3035
-1960
-1837
-1647
-1901
1956
1957
1958
1959
1960
-1644
-1647
Loan
Repaymentf-
New Credits
.
-
Other
- 239
- 366
- 60
- 229
- 562
305
429
487
507
416
219
639
680
493
406
- 889
- 978
- 835
-.914
-1335
479
.659
544
- 620
583
822
621
509
337
533
-1378
-1753
-2139
-2057
-1937
579
599
661
594
651
- 909
-1259
-1517
-1258
-1095
-1857
-2166
-2135
-2130
-2212
803
997
1114
1291
1475
411•••
••••
IMO
OM.
00.
••
Source: Commerce Dept., Office of Business Epanomics
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
T.-7.
/3..2/71
Private Long-Term Capital
rm
This chart is designed to provide more detailed information about long-te
capital movements.
The flow of foreign investment in the U. S. -- direct invest-
1950's
ments and purchases of American securities -- was relatively small in the
and the first half of the 1960's.
Since that time there have been quite sub-
widely.
stantial foreign investments in the U.S. although the amounts have varied
by
A major part of these investments constituted securities being sold abroad
American firms to finance their overseas investments.
These sales followed the
action of the U.S. government in imposing restraints on outflows of capital
from the U.S. to finance the overseas investments.
The chart also shows that U.S. companies have been making increasingly
larger direct investments oiatside the U.S.
The imposition of the foreign direct
again in
investment program in 1955 arrested the trend but outflows increased
1970.
t
Other types of investments abroad by Americans show an iriegular movemen
without decisive trend.
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Federal Reserve Bank of St. Louis
COMPOSITIT1011 OF U.S. BALANCE OF PAYMENTS
PRIVATE LONG-TERM CAPITAL
S
+6
+5
S
il "k.
lib•
I
S
I
•
.
+4
fl
i
+3
E
Ei
11
+2
ti
II
SURPLUS
+1
,
I M77 liriZ VZ7
-Z '
'
Pk
....tr
e
irZZI zs.
-^ Mt11 :ma
,..,
Lt'S4 1,*
r71:2 5g2 '
___,
41‘
1
FOREIGN INVESTMENT IN U.S.
8
1.7"."...""."
...,..a.
k
\
N
OTHER US. LONG-TERM
INVESTMENTS
B OAD
A-
Itiftstlisitmot 4.
4cf,..
-1
...2..:.
,
DEFICIT
1954
https://fraser.stlouisfed.org
t
Federal Reserve Bank of St. Louis
0.,i t.,,t
NRIP.....
----
:
:
....
"
-.........,...'...
'.
.,....
.:R::1
'.•,,,,„
4
.:::::,,,•
•
•
• ?sit_ -,,,,,
is,,,,,, .4,
...%
es
e
11°,es%4*
•
es
Is
e
,h
.
UNITED STATES DIRECT INVESTMENT 4.:'•
•
e
•
•
•
•
•
•
4,1/1
,, m!' ititil"%
e
e
i
_
1956
i
i
1953
1
1
1060
1962
.400"
,i,
I
I
1964
0e
ee
4.
I
I
1056
1968
1
1970
CAPITAL AC.COU'IT
($ Millions)
U.S. Private Capital
Year
Direct InvestrInt
Foreign Capital
Other
1951
1952
1953
1954
1955
-508
-852
-735
-6C7
-823
-437
-214
185
-320
-241
205
165
228
273
390
1956
1957
1958
1959
1960
-1951
-2442
-1181
-1372
-1674
-603
-755
-1440
322
7-855
595
390
81
710
424
1961
1962
1963
1964
1965
-1598
-1654
-1976
-2328
-3468
-1025
-1227
-1698
-2103
-1079
447
269
264
-127
-271
1966
1967
1968
1969
1970
-3661
-3137
-3209
-3070
-3967
-:256
-1287
-1116
-1588
.-1266
1175
1359
5423
4586
3854
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
5/18/7-
Investment Income, Other Services, Private Transfers and Government
Pensions
This chart offers further detail concerning transactions in the current
account.
Its principal feature is the steady increase in net investment income
which has risen from a level of $1.5 billion annually in 1951 to $4.5 billion in
1970.
The rate of increase was strong throughout the 1960's until 1969 when
high interest rates in the U. S. increased the interest payments to foreigners
resulting from U.S. liquid liabilities.
The U.S. position on other service transactions deteriorated gradually
throughout the 1950's and then recovered in the 1960's to show a small positive
position last year.
Private transfers
including contributions by individual Americans to
Israel -- and government pc;1.sion5 being paid to persons living abroad have
gradually increased until they now amount to nearly $1.5 billion annually.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
COMPOSITION OF U.S. BALANCE OF PAYMENTS
,IN:VESTMENT INCOME,OTHER SERVICES, AND PRIVATE TRANSFERS & GOVERNMENT PENSIONS
S Bil.
+5.0
1
1
I.
I
1
I
i
,I•
1
INVESTMENT INCOME (NET)
%
\
ifr
+4.0
1
*
.
SURPLUS
,---'
+3.0
mg
:
7'
1
+2.0
r= ratt r---4 c=sce0
+1.0
—
OTHER SERVICES
(EXCLUD. MIL.) N-..,....
N..,
,..,.1-.:0~'
.
.
—
-,,, .
DEFICIT
---,,------/—
:smi r...,-,---,--.
,.......44.4
•"'"T.---::--73
--j--12 =.-----
EL".
-1.0
PRIVATE TRANSFERS AND
GOV'T. PENSIONS
0
1951
1
!;111!VI N' ()I
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
I
1055
I 1111';
i
I
i
I
1960
1
1965
I
i
1970
1972
AW
INVESTMENT INCOME, OTHER SERVICES & UNILATERAL
1/
TRANSFERS ($Millions)
Net Investment
Income
Other Services
(excluding military)
Private Transfe
& Gov't Pension
1951
1,468
552
-
457
1952
1,407
392
-
545
1953
1,449
69
1954
1,807
.36
-
615
1955
1,955
2
-
585
1956
2,094
96
-
665
1957
2,178
293
-
702
1953
2,176
-147
-
722
1959
2,215
-245
-
791
1960
2,283
-481
-
842
1961
2,800
-517
-
878
1962
3,327
-467
-
7.36
-. 617
-
1963
3,369
-576
-
812
1964
3,987
- 87
-
879
1965
3,985
- 49
-
994
1966
4,312
52
-
992
1967
4,565
-176 -
-1,276
1968
4,880
121
-1,159
1969
4,375
270
1970
4,508
339
1/
.
-1,190
-1,387
Excluding government economic grants.
Source:
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Survey of Current nusiness
/ 5/18/71
Market Shares in Total Exports of Manufactures
The purpose of this chart is to show that the U.S. share
of total exports of manufactures by major industrial countries
has diminished significantly over the past 20 years as other
industrial countries recovered from the war and achieved rapid
growth.
From 1964 through 1968 our position stabilized with
between 20 and 21 per cent of the market.
But in 1969 and 1970
we again lost ground so that our share in this trade is now
only about 1$ per cent.
It may be noted that the U.E. has shown a steady and
serious loss of market shares throughout the 20 year period
while Japan has increased its share from about 3.5 per cent
to 11.5 percent.
Germany increased.its share dramatically
during the 1950's, but for the'past decade has merely held
its ground.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
',-;
SELECTED COUNTMES' MARKET SHARES 1 TOTAL EXPORTS OF MANUFACTURES
BY ELEVEN MAJOR INDUSTRIAL COUNTRIES 1/: 1950; 1955; 1960; 1964-70
30
1
I
I
25
20
GERMANY'
XJ7.7.1===
Ir=r-
U.S.
15
4AN
JAPAN
U.K.
Ct26“,;IZP:JZ 3:t1111:1611ITS 1521111;a2:1F1
_ a
eili:11/11
FRANCE
/11111111111111 III lull'
et2r,Cr"
ITALY
41":12"
5
0
1950
11
1955
1930
1964
TOTAL ALSO INCLUDES EXPORTS FROM BELGIUM, CANADA, NETHERLANDS,SWEDEN AND SWITZERL
AND,
for SOURCE:
FRASER NATIONAL INSTITUT 17 ECONOMIC REVIEW (U.K.)
Digitized
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
1966
1968
1970
1972
(
SELECTED COUNTRIES' MARKET SHARES IN TOTAL EXPORTS OF MANUFACTURES
By Eleven Major Industrial Countries 1/: 1950; 1955; 1960; 1964-70 (%)
1950
1955
1960
1964
1965
1966 -
1967
1968
1969
1970
U.S.
27.3
24.5
21.6
20.3
20.3
20.2
20.4
20.3
19.3
19.0
U.K
25.5
19.8
16.3
14.4
13.8
13.2
12.2
11.3
11.2
10.5
W. Ger.
7.3
15.5
19.3
19.6
19.2
19.4
19.6
19.5
19.5
191
Fr.
9.9
9.3
9.7
8.8
8.8
8.6
8.5
8.2
8.2 •
8.7
Italy
n.a.
3.4
5.1
6..4
6.7
6.9
7.0
7.3
7.3
7.2
Japan
3.4
5.1
6.9
8.3
9.4
9.7
9.8
10.6
11.2
11.5
Source:
National Institute Economic Review (U.K)
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
•
Composition of U. S. Trade
This series of charts is designed to look at the composition of U. S. merchandise
trade to show the kinds of products in which we do well and those in which we have not
been doing well.
In nondurable consumer goods our imports have been growing rapidly while our exports have shown a very small growth.
The same is true of consumer durable goods as shown by the next chart.
This chart
also portrays the situation in one particular sector of consumer durables, that of
radios, television, phonographs, tape recorders, etc.
During the 1960's we moved from
a very small net import position -- about $100 million annually -- to a deficit of
about $1.25 billion annually.
In automobiles and automotive products (excluding our trade with Canada which is
covered by a special agreement) our exports have shown very little growth throughout
th.2 1960's ,,71-1ile our imports hav6 risen from about $400 million in 1961 to $2.4 billion
in 1970.
It is the field of capital goods to which we must turn to see a'picture of strength.
In this category exports have risen more rapidly than imports.
Our net export of capital
goods has increased from about $5 billion in 1960 to more than $10 billion in 1970.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
COMPOSITION OF U.S. TRADE
CONSUMER NON-DURABLES*
S Bil.
2
BALANCE
EXPORTS
IMPORTS
••••••••••
!I
1960
1961
1932
1963
1964
IIII
1965
1966
1967
1963
SOURCr: DEPT. OF COM!.1 CRCE, 013E
• INCLUDES TrxTH_f S e. APPAM.L., FOOTVVCAR, F3OOKS, CIGARETTES, ME.DICINE &
FRASER
PHARMACEUTICALS.
Digitized for
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
I
1969
J1
1970
1971
1972
CUPOSITICM CI' U.S. TRidEF
CONSUMER DURABLES
S
1.0
EXPORTS
k/zx
--4.7
v/y/
rr .t
.
12.0
RADIOS, TV'S, PHONOGRAPHS, RECORDS,
E7 TAPE
RECORDERS.(PART OF TOTAL CONSUMER DURABLES)
-4.1
BALANCE
-3.0
.M•••••••4
-4.0
1960
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
19131
1962
()I (;)PA1.1111r.1
1963
1964
1905
1966
1967
1963
1969
1970
1971
1972
COMPOSITION OF U.S. TRADE
AUTO PRODUCTS
(EXCLUDING CANADA)
S B.
2.0
1
BALANCE
1.0
EXPORTS
0
IMPORTS
-1.0
-2.0
1902
1061
!.,ouP,cr.: or.PT. or COVAIERCE, OBE
1
00
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
1063
1964
1965
1966
1967
1963
1939
1970
1071
1972
COMPOSITION OF U.S. TRADE
CAPITAL GOODS
S Bil.
15
10
•:.:
EXPORTS
::•:.
BALANCE
'•:•:•:•
," v
MININUINISF
IMPORTS
r---
'In
1
1
1950
1°'1
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
)
1052
1063
1
1964
1
1965
1
1006
1
1967
1
1953
1
1909
1970
1971
1972
THE =POSITION OF U.S. TRADE 1960-197
0 (End -Use)
($
1960
Consumer Non-Durables
Exports
826
Imports
714
Balance
112
Consumer Durables
Exports
Imports
562
971
-409
1961
847
644
203.
579
1,000
- 421
1962
1963
1964
1965
1966
1967
866
811
55
914
844
70
998
991
7
1,054
1,191
- 137
1,162
1,349
- 187
1,222
1,556
- 334
570
1,216
- 646
603
1,266
- 663
93
183 .
86
253
73
280
93
290
Auto Products
(exclud. Canada)
Exports
Imports
Balance
817
375
442
i32
312
320
939
557
382
1,092
665
427
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
1969
1,344 1,451 1,
2,009 2,480 2
- 665 -1,029 -1,
706
698
809
825
890 1,017 1,
1,379 1,732 2,108 2,190 2,754 3,422 4,
- 673 -1,034 -1,299 -1,365 -1,864 -2,405 -3,0
Of which
Radios, TVs, Phonographs, Tape Re- carders, Records
Exports
83 •
Imports
146
866
622
244
1968
_
99
399
120
573
120
641
.
148
880
180
1
1,123 ' ,2
1,062
693
369
1,084
994
90
1,029
1,035
- 6
1,075
1,677
- 602
1,152 1,1
1,853 2,3
- 701 -1,:
•
DETERIORATION IN U.S. TRADE BALANCE SINCE 1964
The U.S. trade surplus dropned from a peak of $6.8 billion in 1964 to
$2.1 billion in 1970.
We experienced deterioration in our trade position
with nearly all areas of the world except for Latin America and parts of
Western Europe.
As the chart illustrates, the deterioration in our trade with
Canada was more than $2 billion and the deterioration in our trade with Japan
was $1.5 billion.
$700 million.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
With the EC, our trade position deteriorated about
DETERIORATION OF U.S. TRADE BALANCE SINCE 1964
S BIL
3
70
• 70
"'...6....mmemaisfassmararI
64
':()UP.Ct
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
70
E.E.C.
64
70
• 64
70
64
LATIN
AMERICA
6
OTHER
W. EUR.
•c"
JAPAN
CANADA
CI 1".1:;1,1.; Milli:At) AND .7,1)rwrY or CLICIF1rNT
70
64
OTHER
COUNTRIES
DETERIORATION in U.S. TRADE
BALANCE SINCE 1964
($ millions)
1964
• 1970
2436
1740
Other W. Europe
942
1189
Canada
593
-1645
Japan
200
-1240
74
576
2404
1565
EEC
Latin America
Other Countries
Source:
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Survey of Current Business and U.S. Census Bureau.
TRENDS IN EXPORT PRICES IN SELECTED COUNTRIES
This chart indicates that U.-S.
export prices have been rising much more rapidly
than those of our major competitors.
The index suggests that U.S. export prices
last year were 25', above the level of 1958, while France and Japan showed increases
(expresf;cd in dollars) of ln or less.
The data used in this chart are not wholly satisfactory and should be used
with caution.
It
(..•
very difficult to measure changes over time in prices of
capital equipment and other high technology products which are not highly
standardized.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
•
WO
TRENDS IN EXPORT PRICES IN SELECTED COUNTRIES
INDEX
(1953 = 100)
(EXPRESSED IN U.S. DOLLARS)
130
U.S.
125
OWOMMW,
0-owww.•
A
GERMANY
120
41M1111•••••.1
115
JAPAN
110
FRANCE
.40.1an 123. nos
105 ,
/7:7N
1
to sco
1ES egg
fr
mtko..
"qta.
s•I
#
11
1%*
1.%
.01111111111111111111111111
95
s•s%
•
90
1058
•
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
j
1960
1962
STA1 ', TItS
1964
1966
1968
1970
TRENDS IN EXPORT PRICES IN SELECTED COUNTRIES
(Expressed in U.S. Dollars)
(1958 = 100)
U.S.
U.K.
1958
100
100
100
100
100
1959
100
_99
104
93
99
1960
101
101
105
96
101
1961
103
101
100
96
106
1962
102
102
97
96
106
1963
102
105
100
98
107
1964
104
107
101
102
106
1965
107
109
101
103
108
1966
111
113
101
106
109
1967
113
113
101
105
108
1968
114
106
102
104
107
1969
118
110
105
108
110
1970
126
119
110
r , „ 109
';.;.
121
Source:
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
.
Japan
Prance
Germany
International Financial Statistics
.5j18/71
Trends in Wholesale Prices of Manufacturers
As this chart indicates, U.S. wholesale prices have risen about 17 percent
since 1953.
Measured in terms of dollars, the U.K. and France show slightly smaller
increases in their wholesale price level but both countries have devalued their
Japan and Germany show more rapid increases in
currencies during this period.
wholesale prices.
A major part of the German increase is the result of currency
revaluations in 1961 and again in 1968.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
•••
TRENDS IN WHOLESALE PMCES OF FAANFACTURES IN SELECTED COUNTRIES
(ADJUSTED FOR EXCHANGE RATE CHANGES)
INDEX(1953 =•100)
140
135
130
125
120
115
U.S.
L
ello.1**1
0
61*
U.K.
FRANCE
110
19,A„tti I I
v.r30'3
105
.1
silt it I I 11
se
%s
st %
Aztriar
r
100
95
90
197,3
OA TA
It
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
1960
1964
1962
I 11,)%fl itt..!;.07111:11 COUNIItY SI n
cs
FROM Or CI) MAIN r coNomtc
1966
motcATons
1966
1970
1972
TRENDS IN WflOLESALE PRICES OF MANUFACTURES
IN SELECTED COUNTRIES
(Adjusted For Exchange Rate Changes)
1958=100
France
U.S.
U.K.
Japan
Germany
1958
100.0
100.0
100.0
100,0
100.0
1959
100.8
100.7
100.4
99.0
93.1
1960
101.1
102.3
103.0
100.8
93.3
1961
100.6
105.0
104.0
106.3
96.1
1962
100.7
106.3
104.2
110.6
97.4
1963
100.6 .
107.0
108.3
111.8
100.0
1964
101.0
109.0
108.3
112.9
102.2
1965
102.7
111.9
112.3
115.5
102.9
1966
105.6
114.8
114.7
118.0
105.5
1967
106.7
115.3
116.9
118.7
105.2
1968
109.4
105.0
.121.8
118.5
106.8
1969
113.2.
1063
.
125.2 /
124.5
114.6
1970
117.5
114.2
128.7
137.0
110.9
Sources:
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
r
U.S. Data From BLS; other country series from OECD
Main Economic Indicators
"5/18/71
COMPENSATION PER HOUR IN MANUFACTURING
This chart shows that despite the fact that U. S. wage rates have not risen as
rapidly in percentage terms as those of our major competitors, they remain at a much
higher level and the gap in the amount of compensation measured in dollars has tended
to widen.
These figures tell only part of the story.
relating to changes in U. S. productivity --
Another important aspect
is shown by the charts "Trends in Output
per Man-hour in Manufacturing" and "Trends in Wage Costs per Unit of Output".
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
TOTAL C0PES1TION PER HOUR VIORRED RI
MANUFACTURING INDUSTRY., SELECTED COUNTRIES
1960-70 (IN U.S. DOLLARS)
$ PER HOUR
4.50
4.00
3.50
3.00
2.50
'zoo
ramr.=0
a rj„.,-,
11
2.00
ITALY 1/
FRANCE 1_/
1.50
JAPAN
.
.0.#00''''''''
1.00
.
... „ma
..
.50
<sly Alzr Air
/..;zr
_
,nyr Awr Var A
0
1960
1/ 151
1962
HALE
SOU FICA.:
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
1970 ONt.
HIV
1964
1966
1968
21 1970 NOT AVAIL.
f 110,0 COM:THY 0A1 A AN
ADJUSI NIL NT f- AC1 OHS SUPPL11. ID BY f3LS.
1970
197
•
Total Compensation - Per Hour Worked in Manufacturing Industry
Selected Countries: 1960-70 (in U.S. dollars)
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
U.S.
2.76
2.83
2.92
3.00
3.09
3.18
3.32
3.45
3.67
3.89
4.10
Canada
2.18
2.14
2.08
2.12
2.21
2.31
2.45
2.62
2.82
3.04
U.K.
.87
.92
.97
1.00
1.08\
1.15
1.24
1.27 .
1.19
1.30
N.A.
c. Germany
.85
.99
1.11
1.19
1.29
1.41
1.52
1.58
1.64
1.84
2.17*
France
..82
.89
.96
1.05
1.10
1.16
1.22
1.30
1.44
1.55
1.60*
Italy
.65
.70
.81
.93
1.03
1.09
1.12
1.19
1.24
1.37
1.68*
Japan
.29
.32
.37
-_.--.41
.46
.50
.57
.64
.75
.90
1.n3*
•
•
* 1st half only for 1970.
Source:
•••,,
t-a for FRASER
Digitized
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Derived from country data and adjustment factors supplied by BLS.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
TRENDS IN OUTPUT IN MANUFACTURING
This chart compares U.S. performance with that of other major
industrial countries in output per man hour.
What it brings out
is that the U.S. and the U.K. are not only at the bottom of the
list in performance but are also steadily worsening their positions
in relation to the Japanese, the Italians, the Germans and the
French.
TRENDS HI OUTPUT PER MAN-HOUR 1
INDEX
(1958 = 100)
MANUFACTURING
U.S. AND MAJOR INDUSTRIAL COUNTRIES
1
JAPAN
300
,
,
,
,
,
1
'
,
,
,
,
,
,I
,.
,
,
A
.
••••••
200
.
• ,,..„.."
,
-
100
..
.-:--•-7
,
.....•
, :-_-. •
...
•--- .
,
FRANCE
U.K.
..
-
ITALY
GER
......--
...
...
.
U.S.
.. .....'
.......•--
.
."-
........... ........ ........ •••"'"
_. ............."
.....----
.......
1C3
1952
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
1
...,
1956
.......
j
...........
j
1958
1962
10(171
1966
1968
1n70
TRENDS IN OUTPUT PER MAN-HOUR IN MANUFACTUP1NG
U.S. and Major Industrial Countries
1958=100
U.S.
U.K.
West
Germany
France
1951
84
89
74
68
1952
85
87
77
67.
1953
88
91
81
69
1954
89
93
85
74
94
1955
95
97
89
79
98
1956
96
96
91
83
100
99
1957
99
99
97
92
100
105
1958
100
100
100
100
100
100
1959
106
105
108
102
105
107
1960
109
110
114
106
113
115
1961
113
110
117
110
117
125
1962
118
113
123
121
138
128
1963
123
119
130
125
145
139
1964
128
126
143
134
159
154
1965
132
130
147
139
177
164
1966
135
135
151
148
193
179
1967
138
140
164
155
201
210
1968
142
149
178
166
212
236
1969
146
153
187
199
219
272
1970E
150
155
190
198
227
309
Italy*
Japan
*All industries.
'Source:
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
National Institute Economic Review (U.K.)
5/18/71
TRENDS IN WAGE COSTS PER UNIT OF OUTPUT
In looking at wage costs per unit of output the United States has done much
better.
In the early 1950's we succeeded in reducing wage costs to some
extent, and although they have - risen rapidly in the last three years, in 1970
they were only 67; above the 1958 level.
Our major competitors meanwhile had
allowed their wage costs to rise much more rapidly.
The Italians, French and
japanese show an increase of between 25 and 30% since 1958, while the Germans
and the British show increases of around 40% in their own currencies.
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Federal Reserve Bank of St. Louis
•
TRENDS iN WAGE COSTS PER nil' OF OUTPUT
U.S. AND MAJOR INDUSTRIAL COUNTRIES (IN NATIONAL CURRENCIES)
(1953 = 100)
150
i UK
140
i
if GER
i A.
.
130
JAPAN ---
,
1
17.. '.,Z...s..
'
''
• -1.
;
,-'
-c
---:'
_ - -'
/7 .• ..,„..---- .".",----// ---•
120
.
.
,.
#1 F RAN CE
'
,
#,
/ITALY
*I
I
•
110
-
. .iss
100
r
,
/
U.S.
•
I*
i
1
, I•••'.
.#•• ,
.
\
•
c
0.
,
•• .--*
•
'••
••
'-'•-••............•--004..,
/ it
,
/ - ,
•..,..,
a?
/.
,
N
.
i
.
4/4?
•••••............................
. •
..,...••
90 /•""
-
......,—.•
e^
80 ,
1950
I
1952
.
I
1
1954
1
1956
I
1958
SOUP.Cr: 'VAT inNAL INSTITt)7U FCONOMIC: 111- V1r \IV (U.K.)
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
1960
1962
1964
1966
1968
1970
1972
TRENDS IN WAGE COSTS PER UNIT OF OUTPUT
U.S. and Major Industrial Countries (In National Currencies)
1958=100
U.S.
U.K.
West
Germany
France,
Italy
Japan
1951
1952
1953
1954
98
83
89
90
86
100
1955
97
87
'89
84
89
97
1956
99
94
94
90
92
95
1957
100
97
97
95
' 99
95
1958
100
100
100
100
100
100
1959
98
99
98
104
98
100
1960
97
102
100
106
93
100
1961
95
108
106
110
93
103
,1962
95
'110
113
11.'4,:',;
97
112
1963
94 .
108
114
119
106
116
1964
93
109
113
119
109
116
1965
93
115
121
120
106
120
1966
95
121
131
117
101
122
1967
96
120
125
119
102
118
1968
101
122
120
123
101
120
1969
104
128
125
124
105
124
1970E
106
142
139
127
124
128
Source:
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
National Institute Economic Review
5/18/71
TREND RATES OF GROWTH
This
chart shows that the services sector of the American economy, whose
output in the main cannot be exported, is growing more rapidly than the economy
as a Whole, whereas in other major industrial countries the services sector is
growing somewhat more slowly.
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Federal Reserve Bank of St. Louis
TREND RATES OF GOP
VD SERVICE SECTOR GROWTH
(1955-1968)
GDP
SERVICES
0
U.K.
CANADA
..1- 1. ()r (ti
SOURCE : OE C-70. 1fl C.1;0%,
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Federal Reserve Bank of St. Louis
GERMANY
1..0 1 ,."0
ITALY
RAN CC
U.S.
TREND RATES OF GDP AND SERVICE SECTOR GROWTH
(1955-1968)
Service Sector
GDP
Canada
4.1
4.5
U.S.
4.2
4.0
Japan
N.A.
France
5.2
5.7
Germany
4.7
5.1
Italy
5.0
5.5
U.K.
2.4
2.8
Source:
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Federal Reserve Bank of St. Louis
OECD,
The Growth Of Output
10.2
1960-1980
5/18/71
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Federal Reserve Bank of St. Louis
GROWTH PER OUTPUT, PER PERSON EMPLOYED
This chart shows OECD projections of the growth of output
per person employed which the major industrial countries can
expect over the decade of the 70's.
What is important to note
is that the U.S. growth rate is not only expected to remain
among the lowest of the major countries but also is expected
to decline between 1970-75 and 1975-80.
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Federal Reserve Bank of St. Louis
PROJECTED GROWTH OF OUTPUT PER PERSON EMPLOYED
(Average Annual Rates)
1975-1980
1970-1975
Canada
2.6
• 2.7
United States
3.2
2.8
Japan
(9.4)
(8.4)
France
(5.4)
(5.4)
Germany
(4.4)
(4.5)
4.7
4.8
(2.9)
(2.9)
4.4
3.6
Italy,
United -Kingdom
Total
"
()
OECD Secretariat Estimations
Source:
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
OECD, The Growth of Output:
1960-1980
5/18/71
Project Team
Balaneo of Payments
April 20, l)71
F. Lisle ..ian
cuments
distribution of do
Identification and
ribution of
handling and dist
c
th
te
ta
li
ci
fa
z.ince
In order to
current series olf bal
e
th
r
fo
ed
ar
ep
pr
series of
documents being
to establish four
e
os
op
pr
we
,
ts
ec
rding to
of-pay::lents proj
ered serially acco
mb
nu
be
ll
wi
h
ic
papers, each of wh
n.
date of preparatio
d Review
by the Advisory an
ed
ov
pr
ap
en
be
ve
will
Papers which ha
policy officials
to
on
ti
bu
ri
st
di
r
y fo
series or, if
Group and are read
roject Report" (PR)
"P
a
ries.
in
er
mb
nu
a
LilAted" (PR LIT) se
be given
rt
po
Re
ct
je
ro
"P
in a
ght hand corner
highly !onsitive,
pear in the upper ri
ap
ld
ou
sh
n
io
at
The design
r note, as:
and also on the cove
of the first page
OASIA
Treas
ts
ec
oj
Pr
B/P
PR
(Date)
essed to
willnormallv be addr
r
pe
pa
e
th
ng
bi
ri
tty and
A cover note desc
stant Secretary Pe
si
As
h
ug
ro
th
r
ke
Undersecretary Volc
om me.
t, Mr. Cates or fr
id
hm
Sc
.
Mr
om
fr
go
will
the revise:,
papers are ap?roved
ch
su
of
s
on
si
vi
re
en
Wh
llowed by "/Rev".
original number fo
e
uee
th
ow
sh
ll
wi
nt
docume
a later date will
at
d
te
bu
ri
st
di
be
Appendices which may
llowed by "APP
fo
er
mb
nu
al
in
the orig
documents, and
epared as back-ap
pr
rs
pe
pa
,
ts
af
dr
All
ed for distribuve not been z--7)prov
ha
h
ic
wh
s
on
ti
bu
ri
in a ":orkii-ig
other cont
be given a aumber
ll
wi
s
al
ci
fi
of
cy
li
in a
tion to po
if highly senstive
distrited with
.mt" (;D) series or,
be
Docun,
t
is type shou
th
of
t
on
cu
do
ch
officr which
series. ila
from the drftincl.
re
to
el
ir
If
a.,
Y:::..oje
a covir notc
fies thL. parLicutlar
ti
en
id
d
an
e,
on
rn
pu
cm lains the.
1.ulated.
which the paper is
t
ss -- . nuorr;, .177.1in
will assin the nece
' repro,.JActi
T.72..-ang the n:..1.cc!soar,
d
an
i
runn
tribution.
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Federal Reserve Bank of St. Louis
- 2 Tentz:Itively, we plan the followincj distribution:
(1)
Project Reports -- Limited distribution:
• Under Secretary Volcker
-Assistant Secretary Petty
-Deputy Under Secretary MacLaury
,Deputy Assistant Secretary Webster
vDcputy Assistant Secretary Schmidt
--Do2uty Assistant Secretary Hennessy
-Deputy Assistant Secretary Cates
Willis
Dale
Mr. Bradfield
-nr. Nelson
-Mr. Sam Cross
alr. Harley
Ylr. Schaffner
Mr. Widman
(2)
Project Reports -- Regular distribution:
Those receiving limited distribution documents
plus all members of project teams.
(3)
Working Documents -- Limited distribution:
-/Deputy Assistant Secretary Schmidt
vDeputy Assistant Secretary Cates
t'Mr. Willis
,Mr. Dale
-Mr. Harley
vMr. Bradfield
/lir. Schaffner
-Mr. Sam Cross
'Mr. Widman .
Drafter
(4)
Working Documents -- Regular:
Those receiving limited distribution worl:ing
drafts plus all members of project teams.
,the rre
Curtis\
J
...A.
r
c
'
OAS
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Federal Reserve Bank of St. Louis
'LWidman:bmg
4/20/71
to
1n"ic
rdock ,
.17erar
Secry Volcker
(rough Dr. fclImidt)
April 20, 1971
F. Lisle Wian
Ditribution of DocuFAents Being Prepared for the
nalance
of Payments Project
It will Lc doubt be necessary to prepare quite
a nunber
of papers over the next few months in connection
with the
1.1ance
of payents projects initiated in response to
our
recent discussion. Ve propose to number the papers
prepared
for this series serially and to distribute them
as follows:
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Federal Reserve Bank of St. Louis
(1)
Proct Renorts -- Limited distribution:
Uneler Secretary Volcker
Assistant Secretary Petty
Deputy Under Secretary MacLaury
Deputy Assistant Secretary . Webster
Deputy Assistant Secretary Schmidt
Deputy Assistant Secretary Lennessy
Deputy Assistant Secretary Cates
Mr. Willis
nr. Dale
Mr. Bradfield
Mr. Nelson
lir. Sam Cross
Mr. harley
Mr. Schaffner
Mr. Widman
(2)
Project Reports -- Regular distribution:
Those receiving limited distribu.tion documen
ts
plus all members of project te:s.
(')
:'(.)
. rkinrj Documents -- Limited dif.tribution:
Deputy Assistant Secretary Schmidt
ocputy Ascistant secretary Cates
Mr. vdllis
h
-y
Mr. Bradfield
Mr. Schaffner
TO:
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Federal Reserve Bank of St. Louis
1'el3ru;:3-..y
-.(:-,mrch fl
t
T.
v.,1 1
12, too vill be a
On !-:on.jay,
discusr,ion of
r. Curti_s's n:Aper: "Rocent
r:oteriortion anC1 Current Pehavior
of I% S. Foreign-TraCe Balance." in Poor 5,170
2!30 r).m.
T,nyone who would lihe to attclic',
crm cTet a coy of the paper :ror i. Curtis.
2\
.
...:1;•.s.11:-,:„ :.1olin-()n
• 2/9
n
IWCurLis:cop
RPnt Ifls!:ivr: Deterioration rend Cnivent
1:avior of U.S. For,:ign-T1
111;;I:ce
This mei:lorandum revicws the evo3ution of the U.S.
trade -account i, osition over the past four years, with the
objective o? clrifying as much as p055iL3c three qucstio ,
(a)
Just how long and how far did the deterioration
which began in the last part of 1970 contiiluo?
(b)
What has been the math area coposition of Lhis
recent deterioration in the ai,greL;ate td
position?
c)
What, if any, pattern appears to have been merging during 1972?
The statisLics used in this review are 1.131 in the for;
of sh:.-Ilonth moving averages of seasonally adjusted monthly
data, disregareng the two periods (early-1969 and from
June 1973 throu01 January 1972) when the month-by-mo.oth
trade flews were distorted by major U.S. dock strikes.
•
This is be)ieved to provide a more reliaL3c and ililoy;.lativc
basis for asses:- ing develeionts over this period than any
alternative 5i1Je forLwJz.tion o1 the av;:ilr.1)30
Char t 1. attchc.0 shows the bchavic.r on th:ls
rH' -1 9()9 of the U.S.
foruig)1
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Federal Reserve Bank of St. Louis
p,grcT,aic trade balance w -...th all
- 2 On t!lf basis of the moving -average data shown .by the
heavy blz.ch line in this chart, together with 111,2 indicated
straight-line interpolations bridging over the dock-strike
periods, the chart shows a clear-cut sequence of three
quite different Fitterns:
n
-/
A MC:IXT:
Z.0
nt bctwc(....n early YY
,i
k_9 aa- d
mid -I970 (which was widely recognized to be a
*temporary cyclical effect of our domestic recession).
(b)
A rapid and sustained deterioration thereafter
which alparently continued
nabated through the
whole period of dock-strike distortions into the
first few months of 1972 and n!.iounted in total,
to an alnost $900 nillion 1)cr Nonth (annual rate
over $10 1/2 billion) vdverne m:ing in our global
trade position.
(c)
Since April of last Year, a clear halt to the
previous deterioration but only minimal, if an',
net recovc:ry.
Chart 2. shows t)i::! broad area consition of this
trade. -- tracing, ovey the saLie period
on the s
wi
siN-month::-avera::e bas)s, c)
net trade ha).an
(3) Ca).:da only; (2) iota) other ,velop,:d Areal.;
•
,i
(;) Iota) Less Developed Lountr)es
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
I
v
c44-7--4-1H,H4.--Ak4t Communist areas
tO0
5M;111
tO
- which until mid -l972
sincc: then Da, contributcd an
!AiOW
adr.l.tionl <135 million rer month of average net surp:1.us
tr,wrd inprovenent-of our world,wide position
Major facts evident from this chart include the follow ing:
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Federal Reserve Bank of St. Louis
(a)
Sliohtly rlore than two-thirds of the total amount
of the mid -170 to early-3972 deterioration in our
global trade balance, as well as the timing of the
beginning and end of this aggre4;ate deterioration,.
reflected our trade. vith developed countries other
than Canada.
(b)
Tho igregate balance with a3) less developed
countries shows a similar pattern of initial improvc:Icnt (laging six to twelve months behind
that with devc:loped countries) followed by clercut deter.iorot;on 0tonding f:om the beg:Ln:ling
of 1971 throh at least the niddie of 3ast year;
(c)
The pat1c7n on net trade with Canada in both tol:.
ly 0.iff.;,r(1:t f7om Lh
iv
1:'r;
-. _
_
((f.
I /1'1, cf2..t
t
_
_ __
;th 1a other ar.:.nr-. and
rcnding rnrthcr anHy,js.
More detailed calculations, not shown in those chart
indicate that the tot;q deteriortion (amounting to
)iflion prr ronth, or a 5:7.8 V.:Ilion ann!11
mid-170 ard ear1y-1(;)77 in U.S: net trade with the Other
DevelKwd
3.- ou,.7) of countries was distriblIted as follows:
($250 million) with Japan;
almost
-- a further $200 million with the EC Six combined;
)eaving a 52.00 million reminder spread (more or
less equally) among three sources:
(1) the U.K.;
(2) a residual for "other" West Europe and (3)
the Australia/Now Zealand/South Africa group.
On:c obvious, hut presumably only partial, cau:;o of
these shifts
Was
the divergence between domestic cyclical
patterns in Japan and West Europe compare(l with the United
States.
Clwrt 3, presenting U.S. gros:: imports and gross
exports with this group of countries on the same six-month
movin-averr.gc basis used in the first two charts, shows
pr>.:nts 5)1
vcry cic'ariy the cycl5e:13
turn n
the lwl:L7vior of our net pos:ition on th
iLTolv:tnt co:Ipor;n1
of the ton) trat1 c accernt)no;:1,1y;
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Federal Reserve Bank of St. Louis
()
tA.,k7
-- our rcc,.-, sion cn:::3ine in ihTur.!: du;'inc 1r.ic- )969
A
w;:y in lin: first
vart
of hJ'io to lcncwc(1
rapid i:.:1-io1't
jn thc plcviou!
rpid
1'(')\t 1) ().1
-
5
U.S. exports to these major countries beginnin
in the third quarter of 1970; and
- - a renewal of growth in such exports not finally
:, until the second quarter of last year:
reappearin,
tht particuirly stands out fro-;1 this chrt, is the
strihino discrepncv between the apparent brevity of the
recession induced decline in our imports and the
loin! (1
3/4
years) porlod-of either declino or cc:I-plot() stp,nation
U.S. totn1 exports to those countries. Pending careful
------econometric analyis, it does not vppeaT plausible that
differential cyclical Situations alone can explain this
discrepancy between U.S. export and iiprt performance in
bilateral trade with these countries.
In the case of Less Developed areas, both the country
distribution and the causes of the $300 million month peakto-trouh"deterioration in our aggregate trade balance with
a•t•r1
,
.
.C
1 ^C
,r)111(
.
.31'11N1 ,-
ç
n
,
rcrvy
Li
.cont)y
More
diverse.
examinat -lon and
HOWCYC):, the fol ( :ing points
can
t CO.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Ch.40)*C!ii
ont.— third
is
S5
of our
1C fr.ictol* hL
toial (101
the wor:leniwc; 1):11:.nce
i1
with
for
yiih
::isce)1:)nc.ous
WInr, Yon,
;:roul),
!Thk!th
11
(aCC0111.
vhYre
the
r:11:' of
uor
pa
0,
- 6
total imports (presumably mainly of manufactures)
has been extremely rapid' for several past years
f;hc;w.:.1
)
19726
.....
'eterioration,
-- A sccod al'ea of fairly clear-cut ,
beOnning in m1d-1970, i5 with LDC-Africa (whore
increased imports, presumably c;i1, from Nigeria
and Libya have apparently been the major clement)
-- Most of the remaining deterioration on our LDC
trade can probably be found in Latin America but is not, however, readily, attributable to any
'
particular country, product, or. cause.
statistics .show a roughly
Although the product-category ,
$200 million per month increase sinc-e early 1971 in total
mincral-fue) imports, the bulk of this v-ppears to have
cor4c from the above-cited African LDC's plus Canada.
(With
A
Asia, over this same 1971-72 period, our
all -product gross imports have grown on)y $30 million
than half increased
,
per mcolth whieh :as off:;et by .e
_
exporis).
The
(or lack of 1)::ttel';')
U.S. ne. tradc.,. ii
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Federal Reserve Bank of St. Louis
C;Alada wJ-1.1-nts
Ly C;;Irt
lo,
•
e
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
-7
(a)
This balance is, of course, heavily influenc(1
by the U.S.-Canadian automotive trade which,'
besides being very large, also has strong seasonal patterns of its own and, thus, probably
,-,
should be analyzed separately.
(b)
. ,,---.,
Review of our gross export and import pattern
, •c
,) \
v
'v .\:
.,'N'
with Canada (similar to that shown in Chart 3
for the Other Developed group) suggests that the
approxivate similltancity, plus a more nearly
fl
equal impact on imports and exports, of the
WIZA rAe6(1,641 t.tt
U.S. and Canadian cyclical swingsAshoun by our
net trade balances with Canada from that with
Japan and Europe.
(c)
While the Chart shows a trade -balance ilAprovomomt
with Canada during 1972 that is, ostensibly both
sharper and slightly greater than with the 01.- hor
Developed grouyoughly half of that gain with
Canada reflected an extraordi;lary August shortfall
(r14itt,
4
,
,
•
k4.
•ak./ 4 p.44.4
A.
other imports from Canada.
,
44...••
...IL
a 4. •
cs_f
TO:
!7nner:7;y, Pennett,
17iC=n, Cro53, 11(1crer,
Fc!lotta and P.anson
FROM:
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
reLvuary C, 1i7.1
1 7i1.1.(!tt'1 V:
107:14:11:7)
of interet the
thotic:.it you ni.orht findl
tfricd Faberlf-r_on
attacl,,-(1 co-_-.2nts by Got
icle in the Wall tltrcet
7..rt Laffer':1 recent art
jeurn:11.
Attac1c,lant
Lt:MCJ
OASJi::PEAI:CII:THT , 11e
;/
Removal Notice
The item(s) identified below have been removed in accordance with FRASER's policy on handling
sensitive information in digitization projects due to copyright protections.
Citation Information
Document Type: Article excerpt
Citations:
Number of Pages Removed: 2
Haberler, Gottfried. "Comments on A. Laffer's Paper: Wall Street Journal, February 6." 1973.
Federal Reserve Bank of St. Louis
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Federal Reserve Bank of St. Louis
https://fraser.stlouisfed.org
t or.ki nu. to
1.4Ay
GA 'run (4t cry) p1-11.111
UNITED sTATns C;ovr.RNMENT
7.7-9/3-inf c,"'TA
/It(it
V.A.(lilt(.11 (Al
To
`through:
FROM
ary Willett
Deputy Assistant Secret
Charles Scotta)
FOR INFORMATION
DATE:
January 31, 1973
Coe
Sung I:wack and David -
•
SUDJECT:
lances
ance to the Global Ba
Bal
e
ad
Tr
bal
Glo
.
Relation of U.S
ntries: Revision
of flajor Foreign Cou
cal
data used in the empiri
se
ane
Jap
and
an
adi
. The Can
73 was found to
memo of January 11, 19
those
work reported in the
of payments data from
e
anc
bal
the
h
wit
_
be inconsistent
case of Japan
especially serious in the clude foreign
is
s
Thi
.
ies
ntr
cou
in
stoms clearance" basis
whose imports on a "cu
pped to japan.
military supplies shi
and given
timated the erluations
-es
re
,
or6
ref
the
e,.
that
We'hav
change in our finding is ory
e
abl
not
The
1.
them in Table
an explainat
ada's trade balance as
Can
of
e
anc
ort
imp
e
th
e substance of
h time. However, th
wit
d
nge
cha
has
le
iab
var
ndings below:
; we summarize the fi
ged
han
unc
is
gs
din
our fin
, Japan and
es of the U.S., CDnada
anc
bal
bal
glo
The
improve
1.
e sense that one can
th
in
g
tin
set
off
are
West Germany
expense of the others.
its balance only at the
icantly
not appear to signif
es
do
e
anc
bal
bal
glo
2. Canada's
finding tentaance. We treat this
bal
bal
glo
.
U.S
e
th
reign global
affect
arity between the fo
ine
oll
tic
mul
of
e
aus
tively bec
balances.
rgest
balance have the la
bal
glo
s
an'
Jap
in
s
3. Change
U.S. balance.
negative impact on the
the change
coefficient inCicatcs
h
eac
of
de
itu
Ign
a foreign
::,Tho
ulting fom a chango in
res
e
anc
bal
bal
clo
cs are
.
arc
bal
in the U.S
ning forei:, Global
li
re
the
:i
;ha
,
1der.e
11,
la
gloidz:1 ba
y m1i.eiv that the
mel
tre
e::
r,
eve
how
,
is
constant. It
asE;mption is valicL
iying ceteris Dar3bus
interactions of
the importance
we have
So3ely to illwItrate
the U.S. oloba. balance,
on
es
anc
bal
bal
glo
model where
foreign
-ec equation r cursive
thl
ve
nai
y
ver
a
ecl
i:11,3e. The
construct
the only enocier:iu:: var
is
co
lan
b:!
2.
klpan':;
are atL- hea in T,1;b3u
el
mod
the
of
:_i
np.
ati
tion
es Limatd equ
lion ‘';'llar deteriura
bil
e
on
t
tha
d
iin
we
Using IIIL!
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
L.-.
-2-
in Japan's global balance will improve the U.S. global balance
by 0.974 billion dollars. This figure differs from an improvomerit of 0.817 billion dollars obtained with the ccteris aribu
assumption. We note, however, that the difference between tbe
two values is marginally significant. This is due to the incomplete specifications_of the model, indicating the need of further
intensive work.
The relationship between the U.S. and foreign global
balances estimates for 60:1-71:4 is typical and is shown in
Figure 1. We know from Table 1 that the standard error of
estimates is 1.643 billion dollars. If the sum of Canada,
Japan and West Germany's global balance is a 17.0 billion dollar
surplus in 1972 and if we use a 2.0 standard error criteria,
then the U.S. global balance will be a 6.1 billion dollar
deficit. For the case in which the sum of the foreign global
balances is zero, the U.S. global balance is expected to be
a surplus from 3.5 to 8 billion.dollars.
Attachments including data set
cc:
Messrs. Widman, Cline
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
•
TABLE 1
United States Trade Balance Equations
ft2
SEE
DW
SSR
+ DALwG)
DALus = 6.189 - 0.529* (BALch + BALjp
(16.96) (10.14)
0.684
1.648
1.514
124.9
- 0.359* DALWG
BALus = 5.907 + 0.008* nALCA '-' 0.818* BALjp (1.93)
(6.05)
(14.19) (0.02)
0.706
1.590
1.809
111.3
0.712
1.573
1.806
111.3
0.687
1.700
1.588
109.8
0.712
1.632
1.911
95.0
- 0.720
1.610
1.902
95.9
0.:504
1.563
1.500
103.3
- 0.416* BALwG
BALus = 5.856 - 0.141* BALcA - 0.584* BALjp
(2.19)
(2.96)
(13.90) (0.36)
0.489
1.591
1.657
101.3
DALus = 5.869 - 0.617* BALjp - 0.440* BALWG
(2.48)
(14.14) (3.56)
0.500
1.574
1.740
161.6
0.:‘10
1.551
1.639
93.
DALus = 5.986 - 0.995* BALcA - 0.596* EALjp - 0.342* DALwG
(3.04)
(1.79)
(14.16) (1.69)
O.:03
1.567
1.548
88.!
PALus = 5.946 - 0.694* DALo p - 0.459* PALwG
(2.52)
(13.*/!..) (3.62)
0...7;
1.605
1.739
Sample Period 1960:1 to 71:4
A.
DALus = 5.906 - 0.817*
(14.37) (6.90)
B.
MLJT
0.357* BALliG
(2.08)
...
Sample Period 1962:1 to 71:4
1
+ BAT
DALus = 6.341 - 0.546*'(DALcA + BALjp
(14.16) (9.31)
1
6.053 + 0.020* DALcA - 0.847* BALjp - 0.372* BALWG
(1.93)
(5.80)
(12.68) (0.05)
DAL
DALus = 6.053 - 0.843* BALjp - 0.368* BALWG
(2.07)
(12.86) (6.63)
C.
Sample Period 1960:1 to 70:4
(BALcA + BALjp
DALus - 5.864 - 0.433*.
(15.70) (6.68)
D.
.
DALwG)
Sample Period 1960:1 to 69:4
BALus .-=, 6.111 - 0.525* (DAL
(15.47) (6.45)
Notes: 1.
2.
3.
EM.J.
+ BALjp + BALwG)
tracie balance of country k,Y = US (U..), CA (Canada), JP (JaPm),
ate.s.
and WG (West Ger;:i:lny), Ell of U.S. 6, Annual
for degrees of fre0,1,
R 2 Stands for the percentac.7e of variance esnlained cey-ected
statistic, ami
SEE is the stanlard error of tile estinlatc, W is the r:rbin-Watson
ls.
residua
!pquared
of
SSR is the sum
rigutes in () arc T-ratios.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Illustrative Global Balance Model
Sple Period 1960:1 to 71:4
112
SEE
DW
BAL—% = 0.259 + 0.253* BAL
JP
(2.01) (6.35)
0.456
0.700
0.720
22.6
1.519 + 0.28* BALjp + 0.707* BAL
CA
(6.21) (2.55)
(2.64)
0.464
1.273
0.733
73.0
B,7:Lus = 5.906 - 0.017* BALjp - 0.357* BALwG
(14.37) (G.20)
(2.03)
0.712
1.573
1.306 111.3
=
BAT
=
0.017 + ( (-0.357)*(0.253) ) +
= -0.974* DALjp
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
(-0,357)*(0.707)*(0.258)
j*
BALJP
SSR
TABLE 3
DAtA
U.S. Global
Trade Balance
(1)
Usrl in E9timltion of
Global. Trade Balances of Major Countr
ies
Sum
Canada
Japan
Went Germany
(2)=(3)+(4)+(5)
(3)
(4)
(5)
Total
Global Pa3m,c0f;
(6) 0 (1)4(2)
Mean (60:1-71:4)
Standard Deviation
3.380
2.933
5.308
4.606
0.767
0.949
1.970
2.515
2.571
1.739
0.680
2.713
1960:1
.
2
3
4
3.316
4.780
4.712
6.816
0.885
0.135
1,934
2.611
-0.181
-0.768
0.337
0.000
-0.252
0.064
0.396
0.860
1.310
• .4.838
1.101
1.751
4.201
4.915
6.546
9.42/
1961:1
2
3
4
6.632
6.024
4.128
5.508
1.315
0.703
1.567
1.433
0.024
-0.125
0.535
0.232
-0.580
-0.892
-0.692
-0.068
1.871
1.720
1.724
1.270
7.947
6.72/
5.695
7.001
1962:1
2
3
4
4.444
5.692
3.940
4.160
0.078
0.882
2.0E0
2.702
0.008
-0.149
0.271
0.528
-0.540
0.092
0.848
1.224
0.619
0.939
0.969
0.950
4.522
6.574
6.036
6,862
1963:1
2
3
4
4.320
6.136
3.788
6.720
0.557
1.076
1.844
3.780
0.275
0.275
0.559
0.757
-0.468
-0.384
0.016
0.160
0.750
1.186
1.269
2.856
4.877
7.212
5.632
10.500
1964:1
2
3
4
7.368
7.052
5.288
7.616
1.302
2.317
2.985
3.624
0.130
0.559
1.316
0.596
-1.232
-0.228
0.980
1.983
2.405
1.986
0.688
1.040
8.670
9.369
8.273
11.240
1965:1
2
3
4
4.136
6.394
3.540
5.708
1.704
1.458
2.756
3.333
-0.100
0.600
0.086
0.748
1.604
2.608
2.644
1.104
-0.046
-0.453
0.604
5.840
7.842
6.296
9.041
1966:1
2
3
4
4.848
4.624
1.952
4.284
2.360
2.9E8
5.857
6.706
0.037
-0.182
0.829
0.148
1.490
1.790
2.764
3.000
0.843
1.374
2.264
3.498
7.208
7.632
7.909
10.990
1967:1
2
3
4
4.152
5.592
3.192
2.500
5.392
5.249
5.964
7.050
.0.426
0.104
0.372
1.201
0.608
0.684
1.809
1.54
4.358
4.461
3.792
4.301
9.544
10.841
9.150
9.550
1968:1
2
3
4
1.044
1.752
-0.688
0.388
5.788
7.077
9.267
11.508
0.969
1.454
1.722
0.962
0.472
4.347
3.439
4.164
6.466
6.832
8.829
8.579
11.890
1969:1
2
3
4
0.512
0.524
-0.824
2.428
5.853
7.878
9.102
11.037
0.856
0.301
0.830
1.078
2.24,
3.(5'
4.2(
2.757
3.925
4.003
5.322
6.365
8.402
13.465
1970:1
2
3
4
2.636
4.012
0.C40
1.152
7.781
9.391
11.905
15.161
2.256
2.307
2.782
3.829
4.4
5.73(
3.209
3.705
4.697
5.596
10.417
33.403
12.51.5
16.3)3
1971:1
2
3
4
1.900
-3.312
10.899
32.771
17.814
17.006
"2.646
2.145
2.363
1.776
4.220
6.992
-9.95(
9.9:(
4.011
3.634
5.495
5.250
12.799
c).(Y.;
13.503
11.770
-4.3,,,a
-5.236
Notes:
3.3E;(.,
4.086
1.
All fiqures aro in bi11ion5 of U.S. dollar
s, at annual :.atcsi a negative fie
repre:ients a deficit.
2,
All data in f.o.b. ex7ept for west German
imports whir. are c.i.f. (a9 leport..-1 in
their balan:.7e of pay7,-nt9 statistics).
SOMCLS:
UnItc,1 !Aates, f.0,vesv of Cnrrent
VOP, T.Ible 2.
(••
for-nvt
intern:It:1;m
P,)ary70 !
at:1 .1•11i)h,_:•,. of 1•.•:7%-!.. nt fsf
Vt's!st
o! I!,,,
i,01,!/•:',!, !hi:, . -,,p1.(•ii,:nt
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
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Federal Reserve Bank of St. Louis
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
_
BALANCE-OF-PAYMENTS STUDIES
WORKING DOCUMENTS - REGULAR
of Documents
Identification and Distribution
WD-1
April 20, 197.
WD-2
WD-3
gps
Payments
Effect on the U.S. Balance of
U.S. Capital
on
of Elimination of -Controls
Outflows (LOU)
61101
ital Flows
U.S. Government Grants and Cap
(excludes MAP Grants)
tions
U. S. Agricultural Export Projec
WD-4
WD-5
5 (LOU)
U.S. Balance of Payments in 197
(by Mr. Schaffner)
WD-6
WD-7
WD-8
WD-9
WD-10
WD-10
APP C
April
7, 197'
April 22, 1971i
April 22, 197.
April 16, 197'
8, 197:
es of the Major
Projected Demands for Reserv
Fauver)
Oil Producing Countries (by Mr.
(CONFIDENTIAL)
April
Transportation
A Projection of the Accounts on
l .Transfers to
"Other Services," and Unilatera
1975 (CONFIDENTIAL)
April 13, 197:
(CONFIDENTIAL)
Worksheets (WD-10 Appendix B)
April 22, 197'
Project B,
Draft of Preliminary Report on
"Trends in World Payments"
April 21, 19 —.
-Payments
A Review of U.S. Balance-of
U)
(LO
Projections to 1975
April 15, 197:
/?7/
ii
Peet
WD-10/REV
WD -10
APP,
WD-11
Investment Income
Forecast of U.S. Balance on
Mr. Schaffner)
and Capital Flows in 1975 (by
(LOU)
WD-12
Commercial
Projections for U.S. Trade in
Aircraft
WD-13
g Forecasting
Some Observations on Developin
t
Equations of the Current Accoun
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
4y 4
,
,q7
April 22, 19
April22, 1'
April 22,
1 n7
t
‘
111.11•Mm•••••••:11mali
WORKING DOCUMENTS - REGULAR
2 WD-14 (PR-3) Financing of U.S. Balance of Payments
(CONFIDENTIAL)
Deficits
WD-15
'Aik;ril 23, 1971
April 22, 1971
1975 Trade Forecast (LOU)
)
WD-16 (PR-4) Trends in World P.vments CONFIDENTIAL
obi F 4 kw ri
cc
Pro4ciltiods
IMP
,
on
lirigs
-Ivry
(TWA
APP-A
The Attainment of U.S. Payments Equilibrium
WD-17
Through Differential Rates of Price
Increases
April 30, 197
April
'77/
April 28, 1971
WD-18
Canadian Trade Equations
April 28, 1971
WD-19
U.S. Imports of Natural Gas from Canada
April 28, 1971
WD-20
U.S. Imports of Newsprint from Canada
April 28, 1971
WD-21
U.S. Private Liabilities
WD-22
Geographic Pattern of U.S. Trade (CONFIDENTIAL) May
WD-23
New OBE Exnort Equation and Estimated
Effects on 1975 Projection
WD-24
. Financing of Major Canadi,an Projects
U.S.
and Impact on Canadian Balance of Payments
WD-25
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Federal Reserve Bank of St. Louis
(CONFIDENTIAL)
U.S. Imports of Woodpulp from Canada
_
zis. Co/.2.64-C
i
'
-1'
t
/ K.:11,;.
•
,
4
May
3, 1971
3, 197
May 12, 1971
May 27, 1971
May 27, 1971
Treas
OASIA
B/P Projects
WD-1
Anril 20, 1971
OPTIONAJ.. IONS. NO. 10
MAY 1012 EDITION
GSA 'run (ii crn) 101-11.1
UNITED STATES GOVERNMENT
Memorandum
TO
:
Balance of Payments Project Team
FROM
:
F. Lisle Widman
SUBJECT:
DATE: April 20, 1971
Identification and distribution of documents
In order to facilitate the handling and distribution of
documents being prepared for the current series of balance
of payments projects, we propose to establish four series of
papers, each of which will be numbered serially according to
date of preparation.
Papers which have been approved by the Advisory and Review
Group and are ready for distribution to policy officials will
be given a number in a "Project Report" (PR) series or, if
highly sensitive, in a "Project Report Limited" (PR LIM) series.
The designation should appear in the upper right hand corner
of the first page and also on the cover note, as:
OASIA
Treas
B/P Projects
PR
(Date)
A cover note describing the paper willnormally be addressed to
Undersecretary Volcker through Assistant Secretary Petty and
will go from Mr. Schmidt, Mr. Cates or from me.
When revisions of such papers are approved the revised
document will show the original number followed by "/Rev".
Appendices which may be distributed at a later date will use
the original number followed by "APP ".
All drafts, papers prepared as back-up documents, and
other contributions which have not been approved for distribution to policy officials will be given a number in a "Working
Document" (WD) series or, if highly sensitive in a (WD LIM)
series. Each document of this type should be distributed with
a cover note addressed to me from the drafting officer which
explains the purpose, and identifies the particular project to
which the paper is related.
Mrs. Webber will assign the necessary numbers, maintain a
running index, and arrange the necessary reproduction and distribution.
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Federal Reserve Bank of St. Louis
+ft
- 2 Tentatively, we plan the following distribution:
(1)
Project Reports -- Limited distribution:
Under Secretary Volcker
Assistant Secretary Petty
Deputy Under Secretary MacLauryDeputy Assistant Secretary Webster
Deputy Assistant Secretary. Schmidt
Deputy Assistant Secretary Hennessy
Deputy Assistant Secretary Cates
Mr. Willis
Mr. Dale
Mr. Bradfield
Mr. Nelson
Mr. Sam Cross
Mr. Harley
Mr. Schaffner
Mr. Widman
(2)
Project Reports -- Regular distribution:
Those receiving limited distribution documents
plus all members of project teams. *
(3)
Working Documents -- Limited distribution:
Deputy Assistant Secretary Schmidt
Deputy Assistant Secretary Cates
Mr. Willis
Mr. Dale
Mr. Harley
Mr. Bradfield
Mr. Schaffner
Mr. Sam Cross
Mr. Widman
Drafter
(4)
Working Documents -- Regular:
Those receiving limited distribution working
drafts plus all members of project teams. *
Other members of the nroject teams include Messrs.
Klock, Lederer,
Brown, Curtis, Fauver, Gaaserud, Grubel, Reran,
Miss Steiner.
and
,
Newman
Leddy, McCamey, McFadden, Meissner, J.
TIF,
* Suhinnt to snnurity clParance on (:!onfirinntiAl donump
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Federal Reserve Bank of St. Louis
1 1,1rmw
01,1
B/P Projects
•!
WD-4
Anril 22, 1971
1
des MAP Grants)
• U.S. Government Grants and Capital Flows (exclu
the
The U.S.G. grant and capital account is composed of
ts.
accoun
following line items in the U.S. balance-of-payments
Line 29:
U.S.G. grants (excluding military grants)
Line 42:
Vet transactions in U.S.G. loans and long-term
assets. These are mainly long-term (over one year)
loans and credits used to finance - U.S. exports.
Roughly 1/3 by AID, 40% by EXIM Bank, and 25%
PL-480 loans. The rest finance military sales.
Line 43:
Foreign currencies (soft) net. Net increases are
usually from sale of agricultural surpluses for
local currency and loan payments in local currencies.
Includes also local U.S. operations involving use of
local currencies such as Embassy accounts.
Line 44:
Scheduled repayment of principal of U.S.G. capital
assistance loans.
•"."--:`-••••" •
•
Projected Government Grants and Capital Account
(ailions of Dollars) .
me
29 GRANTS (-)
42 LONG-TERM LOANS (-)
Assumption 1*
Assumption 2*
43 FOREIGN CURRENCY (-)
44 SCHEDULED REPAYMENTS ( 1)
Assumption 1 ri2OTAL (-)
Assumption 2 TOTAL (-)
1970
1971
1972
1973
1,562
1,086
1,137
1,260
3,137 3,623
3,137 3,623
97
23.
1,420 1,550
1974
1975
1,260 -1,260
3,631 '3,669
3,631 3,919
229
188
1,680 1,810
230
1,940
4,763
5,013
230
2,070
3,348
3,598
3,758
4,003
4,183
4,433
3,302
3,256
3,276
3,302
3,256
3,276
4,208
4,458
aftcr 1972 current authorization of military
* AssurV-Son 1
credit sales to Israel will not be continued. Assumption 2 military credit sales to Israel will be continued at an annual
rate of $250 million after 1972.
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Federal Reserve Bank of St. Louis
- 2
PROJECTIONS OF U.S.G. GRMT AND CAPITAL FLOWS
GRANTS - U.S.G. non-military grants are primarily technical
assistance, PL-480 AID (about 1/3 of Food for Peace
expenditures), and contributions to international
organizations. With the new emphasis on channeling
our aid through multilateral organizations, on
given
reducing direct bilateral aid, and on loans
able
reason
in a "business-like" manner it seems
to project declining technical assistance programs,
increasing grants to international organizations,
and roughly constant levels of PL-480. Using 1972
budget estimates and Commerce fiigures for calander
year 1970 gives the fo1lowing:P-1
1972
1971
1970
Contributions to multi. orgs.
Bilateral assistance
Approx. 1/3 Food for Peace expen.
(less development loans)
0.011.111.0.0
Ombmwtomasa
Magoirow.~
-495
-415
-1,011 -1,056
-300
-330
714
670
-1,562121-1,036 -1,137
TOTAL grant aid ($ millions)
will
Assuming that projected•1971 and 1972 aid levels
e of
averag
the
-using
not be' further reduced,- and arbitrarily
1973,
in
grants
for
1970 to 1972, gives a'projected figure
1974, and 1975 of $1,260 million.
LONG-TERM LOANS AND ASSETS - These are mainly long-term loans
and credits used to finance coromercIal and military
credit sales. Principal )ending apencies are the
Export-import Bank, the Food for Peace Program
(Administered abroad by State), DOD, and AID's
successor, the International Develcoment Corporation.
Using 1972 budget estimates gives the folloving estimates for:
Developent loans
Export-Im-2ort loans
Military credit sales
Food for Peace (PL-480)
TOTAL
• 109'0
' 1971
• 1972
745
670
714
1,569
1,738
1,852
93
515
415
730
700
650
7
5.737
.
3,623
it/ 1J.S. -E7-11-a7Jet- e:,timaCcs for fiscal years 1970 and 1972 arc used for
estites for calander years 1971 and 1972 on the theory that in
time it will all come out in the wash.
https://fraser.stlouisfed.org Based on Cormorce figures for the first three quarters of 1970.
_ ,
Federal Reserve Bank of St. Louis
-3 -
Military credit sales in 1971 and 1972 include respectively
$375 and $125 million in sales to Israel. Assuming that
these amounts do not recur in 1973, 1974, and 1975, but that
the Nixon Doctrine is implemented by increased credit sales
of military equipment gives:
•
1975
1974
1973
700
700
700
1,926
2,405
2,900
Military credit sales (annual $60 mil.
increase)
350
410
470
PL-480 (average of 1970-72 figures)
693
693
693
3,669
4,208
4,763
Development loans
Exim loans (assuming cont. $200 mil.
annual increase in loans)
TOTAL
..„ .
.
However, since it is more likely that our MCS to Israel will
continue at at least 507 of the current rate, or around $250
million annually, the total figures would be: 193 - $4,043,
1974 - $4,303, 1975 - $4,563.
FOREIGN CURRENCIES* - Our net holdings of soft foreign currencies
result from receipts for the sale of agricultural surplus
commodities and from interest and principal payments on
local currency loans and from disbursements for grants
and credits and U.S.G. local expenditures by U.S.
installations such as bases and embassies. Receipts froT711
sales of agricultural commodities have been declining
steadily at between $100 and $200 million per year. As
a result of Congressional directive, soft foreign currency
sales of agricultural surpluses under PL-460 will be
phased out by 1973 or 1974 in favor of 20 to 140-year
dollar credits. Dollar revenues from the change are
unlikely to affect the balance of payments before 1975.
expected to
Other soft currency sales of surpluses areL..
projcctcd
th;s itr,m would
I_,_jns;gnif:cant.:
as follows:
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
3.970
3971
1.972
1973
3974
1975
- 4 are running at about
Interest payments on soft currency loans
outstanding in
$200 million, and with at least $3 billion
likely that interest
dollar value maintenance loans, it seems
average rate of about
payments will continue to increase at an
a result of the
$4 million annually before leveling off as
elimination of PL-480 soft-currency sales.,
1970
1.971
- 1972
1973
- 1974
1975
$200
$204
_$208
$212
$216
$220
ts of principal continue
On the same basis, assuming that repaymen
gives:
to increase at an average rate of $10 million
1970
1971
1972
1973
1974
1975
$159
$169
$179
$189
$199
$209
tuate from year to year
"Other sources" of foreign soft currency fluc
see the same
and assuming that the period through 1975 will
nd $15 million,
fluctuation gives an average annual figure of arou
settled at
Grants in the recipient's currency seem to have
may be about
around $150 million, although the figure for 1970
its in the
$162 million based on three quarter figures. Cred
five years
recipient's currency have varied widely in the past
showing
but they seem to be generally moving downward with 1970
be to
to
about $150 million. The safest prediction would seem
l of around
project an average annual soft currency credit leve
$150 million.
seem likely to,
.U.S. Go'vernment administrative expenditures abroad
, giving:
increase at a slow rate, say around $5 million annually
1970
1971
1972
1973
1974
1975
$340
$345
$350
$355
$360
$365
and adding
Putting these figures together in a summary table
ency and
gives the following picture of U.S.G. foreign curr
other assets holdings:
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Federal Reserve Bank of St. Louis
•
• •••••
•
- 5 SUMMARY:
SOFT FOREIGN CURRENCY TRANSACTIONS
1970 1971 1972 1973 1974 1975
Receipts from sales of
agricultural surpluses
Interest payments on
. loans
Repayment of principal_
Other sources of for. cur.
-
260
160
60
10
0
0
200
204
208
212
216
220
159
169
179
189
199
209
10
15
15
_15
15
_15
62Y 5TY
.
T6Y
426
430
150
150
345
150
150
350
150
150
355
645
650
435.
less disbursements for:
150
162
340
Credits
Grants
U.S. Govt. expend.
Total change in for, cur.
and other assets (- is $
-23
outflow)
150
150
360
633. •
660
150
150
365
-97 -183 -229 -230 -230
The average increase in scheduled repayments of principal
for 1966 to 1969 was $130 million. If this trend continues,
repayments will be about as follows:*
$ millions
1970
-1971
1972
1973
1974
1975
1,420
1,550
1,680
1,810
1,940
2,070
outstanding
*However, payments on as much as $8 billion in
duled during
dollar debts of 11 countries could be resche
scheduled repaythe next five years. This would reduce
g all the items
Puttin
ments by perhaps as much as 50.
ted on page 1.
presen
together gives the summary table as
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Robert D. Brown
4/8/71
OASIA
Treas
B/P Projects
WD-5
April 22, 1971
rOTIM N. ID
,
2
f•!•.1' 12
SA PPMFt (41 cfn)13%.11.4
UNITED STATES GOVERNMENT
VT
'
1'72
0/"O 2,c)7'
TO
Mr. F. Lisle Widman
FROM
Robert Brown
sunjEcT:
ons
U.S. Agricultural Export Projecti
DATE:
April 22, 1971
ons to 1975 of the
The agricultural export prOjecti
trend extrapolations are
USDA plus linear and log linear
1971. These projections
presented in my memo of April 9,
world payments project.
could be used in the trends in
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Trcar,
nAm\
B/P Projc,ct5.
WD-5
April 22, 1071
U.S. AGRICULTURAL EXPORT PROJECTIONS
long run upward
U.S. agricultural exports follow a
the attached chart
trend set by population growth, but as
year both in volume
shows, fluctuate widely from year to
and quantity.
frequently
Fluctuations around the trend are
crop production around
due to unforeseen weather effects on
figures indicate that
the world. For example, preliminary
ed at about $7.2
calendar year 1970 exports were valu
dollars higher than
billion. This was about one billion
in Russia and poor
expected because of unforeseen droughts
peanut crops in Africa.
As a result of the droughts in
s were poor.
the USSR, Russian sunflower seed crop
The com-
r seeds and peanuts
bination of the low supply of sunflowe
elsewhere for large
meant that feed producers had to look
volumes of oil bearing seeds.
Because of unusually
an artificially
favorable weather conditions here and
soybean prices
narrow price gap in the EC between U.S.
we were able to market
and competitive foreign commodities
rose considerably
our soybeans. Our wheat exports also
supplies.
because of drastically reduced EC
As a result,
higher than predicted.
our agricultural exports were much
predictions of agriThe point of this example is that
uction year out are
cultural exports more than one prod
indicators of expected
practically meaningless except as
rtment of Agriculture
trend values. A year ago the Depa
_evolop-,
1 (1
cted agricultur a_
made a comprehensive survey of expe
and predicted U.S.
mmts in every country, added them up,
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
t__ _
•
agricultural exports for the next five years.
•
• • -•-••• • ••• •••••••
••••••••••••••••••.....•
Even though its
exports,
predictions for this last year fell far short of actual
e of the futility
it has not revised its estimates, primarily becaus
year in advance.
of predicting key crop production for more than one
ted export figur.
Therefore, the following Agriculture Department projec
ed exports.
should be taken as trend values rather than as expect
projections.
For comparison I've run linear and log linear trend
The log-linear estimate of annual growth was 3.8%.
In view of
are just as
last year's exports I think the log-linear figures
reasonable as Agriculture's estimates..
Projected Agricultural Exports 1971-75
(billions of dollars)
Agriculture Dept.
Projections
Log Linear Trend
Linear Trend
1970
$7.2(6.o51)-.$6.574
$6.766
1971
$6.211
$6.750
$7.027
1972
$6.385
$6.926
$7.299
1973
$6.520
$7.102
$7:581
1974
$6.670
$7.277
$7;874
1975
$6.820
$7.453
$8.178
The DcpartTent of AFriculture esti-nated :6.051 billion for FY 70 agricurtxral
exports. Actual 17.70 exports wore valued at 6.7 billion and calander
year fir,urcs were around *7.2 billion. For purpof:os of cstitrating futu-.2e
' balances of payments, fiscal year projections should work as well as
calandr year prejoetins because year to year differences in projected
agricultural exports are small.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Robert D. Drown
145/71
D. rlIcy.o.:
NOVEMBER 1V70
/AS-1 ,
I
. RS
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1
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140
. INDIAN & SOVIET
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U.S.DOCK STRIKE
Volume
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•••••,
60
1954
'57
'60
'66
'63
'69
'72
YEAR EL- GINNING JULY 1.
U.S. DEPARTMENT
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
or
NEG. ERS 7451-70 (11)
AGRICULTURE
6
ICE
ECONOMIC RESEARCH SERV
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-.1::
jections
U.S. At7ricu1tural Ex -)ort Pro
of agricultural products
The figures for exports
sing
tion were obtained by regres
actually used in the projec
t time for the base period
agricultural exports agains
then forecast for the period
1960 - 1970. The trend was
1971 - 1975.1/
was
imation, the 1966 figure
sually
1/ Prior to the trend est
million to reflect unu
adjusted 6ownwarca by $100
1969 ficycre was adjucted
PL-480 deliveries and the
vide for the OE-ested
up.::d by $200 million to pro
e on agrif,:ultural e::ports.
effect of the 1969 doc% str:_k
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Jon M. Gaaserud
Lpril 21, 1971
OASIA
Treas
B/P Projects
WD-8
April 13, 1971
•
•
on, "Other
A Projection of the Accounts on Transnortati
1975
to
s
sfer
Servics', and Unilateral Tran
ard to 1975
This paper is an attempt to project forw
"other services",
the balance on transportation, balanceon
s in the form of
and the outflow from unilateral transfer
.
private remittances and government pensions
s 6
The transportation balance consists of line
and 17 in
on the balance of
Table 1 of the quarterly Survey article
s 9, 10, 19 and 20;
payments; "other services" consists of line
30.
and unilateral transfers of lines 27 and
owing table:
The projections are contained in the foll
Table I
U.S. Balance of Payments, 1970 - 1975
($ billions)
Projections
Actual
1970
1971- 1972
1973
1974
3.7
3.9
4.1
1975
4.3.
3.7
3.6
(2) Transportation Payments -4.0
-4.0
-4.2 . -4.4
-4.6
-4.8
-0.3
-0.4
-0.5
-0.5
-0.5
-0.5
2.3
2.4
2.5
2.6
2.7
2.9
-1.5
-1.4
-1.5 -1.5
-1.6
-1.7
0.8
1.0
1.0
1.1
1.1
1.2
-1.4
-1.4
-1.5
-1.5 -1.6
-1.7
-0.9
-0.8
-1.0
-0.9 -1.0
-1.0
(1) Transportation Receipts
(3) Transportation Balance
(4) "Other Services" Rec. '
(5) "Other Services" Paym.
(6) "Other Services" Bal.
(7)
3/
Unilteral Transfer ti-
TOTAL (3), (6), & (7)
1/
ts
Excluding U.S. Governmo,nt economic gran
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Federal Reserve Bank of St. Louis
ng the three accounts
The projections were obtained by regressi
period 1960-1970.
independently against time for the base
The
od 1971 to 1975.
trends were then forecasted for the peri
are -a number of
Although it is clearly true that there
unts the very high
economic variables which affect these acco
quarcd) obtained from the
.multiple correlation co-efficients (R-s
other variables may be
regression on time indicate that these
largely offsetting.
Nevcrtheles
when the common assumptions
are available it would
which are to be developed for this exercise
s in order to see how much
perhaps be useful to add other variable
the results are altered.
the inclusion of a
One suggestion which commends itself is
situation on the
dummy variable to measure the Middle East
transfers.
transportation account and in unilateral
Since most
too might be tried.
services are a function of income, this
of these accounts using
However, for the present, the projection
le forecast.
a time trend should provide a reasonab
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Federal Reserve Bank of St. Louis
Jon M. Gaaserud
April 13, 1971
Removal Notice
The item(s) identified below have been removed in accordance with FRASER's policy on handling
sensitive information in digitization projects due to internal or confidential information.
Citation Information
Document Type: Internal research - Treasury
Citations:
Number of Pages Removed: 8
Confidential: Projected Demands for Reserves of the Major Oil Producing Countries, April 8,
1971.
Federal Reserve Bank of St. Louis
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Federal Reserve Bank of St. Louis
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Treas
OASIA
B/P Projects
WD-12
April 22, 1971
OPTIONAL ronm Ho. to
MAT tICI ICOrTION
GA PPMII (41 OPP) 101-11.11
UNITED STATES GOVERNMENT
Memorandum
Mr. F. Lisle Widman
TO
FROM
:
SUBJECT:
DATE:
Anril 22, 1971
Jon M. Gaaserud
Projections for U.S. Trade in Commercial Aircraft
Attached is the letter I received on April 20, 1971,
from Commerce which updates their Projections of exports
of commercial aircraft through 1975. It should be helpful
to the balance of payments project on trends in world
payments.
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Federal Reserve Bank of St. Louis
D.... TI
77
.... AL
L.
1-)7
U.S. DEPARTMENT OF COMMERCE
Bureau of Domestic Commerce
Washington. D.C. 20230
•
April 19, 1971
Mr. John Gasserud
Office of the Assistant Secretary for International Affairs
Department of the Treasury
15th and Pennsylvania Avenue, N.W.
Washington, D.C. 20220
Dear John:
This is in response to your telephone request of April 6, 1971, for an
updating of our last year's projections on exports of large commercial
aircraft for each calendar year 1970 through 1975. On April 8th
preliminary figures were telephoned to you. This letter will serve to
verify the figures and give a short analysis of the five year trade.
Trade in Commercial Aircraft
1970#
Exports
Imports
Balance
169/1,166.5
7.0
4/
1,159.5
1972
1971
138/1,554.4
12.0
6/
1,542.4
1973
1974
45/913.6 52/952.0 65/1,145.0
5/ 125.0
0
0/
0
0/
1,020.0
952.0
913.6
1975
40/604.0
12/300.0
304.0
Notes:
1.
2.
1970 figures are actual
Units/$ Million
The 1970 exports reflect the initial deliveries of Boeing 747's to
foreign customers. In 1971 it is anticipated that 42 Boeing 747 aircraft
will be exported, swelling the value of exports to $1.5 billion, an alltime high that will not be approached for at least ten years. During the
year 1972, fewer exports of the Boeing 747 are expected, with only a few
of the new DC-10 tri-jets scheduled for foreign delivery. In 1973 exports
of 30 of these new wide-bodied jet transports, 16 of the Boeing 747's and
none of the Boeing 707 and Douglas DC-8 types are anticipated.
During 1974, a vast reduction in foreign deliveries of DC-9 and Boeing 737
types will take place with exports of Boeing 747's and DC-10's remaining about
equal to the previous year. We will also be faced in 1974 with the first
imports of the high-value British/French Concorde supersonic transport,
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--7- :
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Federal Reserve Bank of St. Louis
rt.
a
5 aircraft valued at $125.0 million. During 1975, an additional 12
Concordes will be imported having a total value of $300.0 million,
while we will be exporting fewer of the Boeing 747's and DC-10's than
during the previous year.
The U.S. Industrial Outlook 1971, Aerospace, copies of which were forwarded to you on April 8, 1971, reported a reduction in demand for our
large transports by our U.S. airlines. The additionally reduced demand
by foreign airlines, plus the importation of the Concorde, will adversely
affect both our overall balance of trade and the economic strength of the
U.S. aerospace industry.
Sincerely,
(17YS
Randolph Mye s, Jr.
Aerospace Industry Specialist
Transportation Division
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Federal Reserve Bank of St. Louis
B/P Project
WD-13
Anril 22, 1971
CPTiotim.roreANCLIO
MAY lt-2 ALL•tT11t4
GSA Frtort (is cm)101-Mg
'UNITED
TO
Ir.
STATES GOVE1CNMENT
Widman
DATE:
Anril 22, 1971
FROM :
;
Michael Xeran41-.44
SUBJECT:
Some Observations on Developing Forecasting Equations
of the Current Account
Attached is an initial draft of a paner which I
have called, "Some Observations on Develoning Forecasting
Equations of the Current Account." I would very much
appreciate obtaining comments from others in the Treasury
on this document. You may also find it useful in connection with the balance of payments project series.
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Federal Reserve Bank of St. Louis
Buy U.S. Savings Bands Regularly on the Payroll Savings Plan
'Michael W. Keran
4/14/71
SOME OBSERVATIONS ON DEVELOPING
FORECASTING EQUATIONS OF THE CURRENT ACCOUNT
In.forecasting the balance of payments,, the conventional
procedure is to disaggregate the estimating process to as large
the
an extent as possible within the conventional confines of
balance of payments identity.
Balance of Payments = Exports - Imports -I- Net Capital
Each item in this identity is usually broken down into as many
categories as the data permit.
A rationale for this procedure
is that the finer the disaggregation of the balance of payments
components, the "purer" the behavioral influences which can be
measured.
For example, the imports for consumer goods*
respond to changes in disposable personal income of households;
imports of industrial goods
respond to investment demand;
imports of raw materials and semi-finished products
to changes in inventories.
respond
It is generally assumed that dis-
aggregating the data, thereby focusing in on the specific
behavioral influences, will enhance our ability to forecast the
balance of payments.
Such an assumption is not always valid.
When one attempts
to develop a forecasting model, it is necessary not only to
forecast the endogenous components in the balance of payments
identity, but also to forecast the exogenous variables in the
equation.
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Federal Reserve Bank of St. Louis
Thus, two sources of potential error emerge in
-2forcasting: one is the well-understood error between the dependent and independent variables, and the fact that the more
disaggregated the model the larger the number of potential weak
links.
The second source of error is the less-understood one
between the estimated value and the actual Value of the independent variable.
The more disaggregated the estimating procedure,
the greater the number of exogenous variables and the greater
the potential for error of the second type.
Thus, even if
disaggregated equations provide superior estimates of the
individual components of imports, it may be inferior as a
forcasting device to a more aggregative equation.
The aggro-
gative equation estimates total imports and therefore, requires
knowledge of less structural detail and a c77aller number of
independent vaiables which must themselves be estimated.
As with any economic problem, we are faced in this situation
with a trade-off at the margin between "structural richness"
(presumably superior with the more disaggregated models), and
.forecasting efficiency (which is most likely achieved with the
more aggregated models).
This paper will test a very simple
set of aggregated versus disaggregated models for (1) their
structural richness, and (2) their forecasting efficiency.
STRUCTURAL RICHNESS
The most aggregative import equation feasible would say
that nominal imports of goods and services are a function of.
current and lagged changes .in domestic demana for goods and
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Federal Reserve Bank of St. Louis
_3_
services, measured by nominal CNP.
Such an equation would take
the following general functional form:
t 71: (X 0 -I.
z
Where IM is nominal imports
Y is nominal GNP. (N) equals
the number of time periods in
which logcd values of Y effect
current values of IM. We would
expect oc, , to have a positive
value.
A more structurally realistic formulation would be that
total real imports of goods and services is a function of
domestic real income, U.S. prices relative to foreign prices,
and the domsetic CUP gap (to measure nonprice rationing).
This could be written in the following general functional form:
w pj_
t-i
Where IM* is real imports, X is
real GNP, WPT is U.S. wholesale prices,
Pim is U.S. import prices (a proxy
for foreign export prices) and CAP
is the difference between potential
and actual real GNP.
The expected values of >(, and el\? are positive and
is negative.
This form would take into account income and
substitute the effects on imports as well as any unusual demand
pressures generated by how close the economy was operating to
capacity.
There is no end to further disaggrogatf,on which could
take place.
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Federal Reserve Bank of St. Louis
However, one natural stop would be to estimate
-4-
S
the equation for import goods only.
The arguments used would
be the same as those in explaining imports of goods and services.
In addition, these equations could be estimated either in
the form of levels or changes; they could be estimated in linear
form or log linear form.
It was decided to estimate these
equations only as changes in both linear and log linear form.
The results are presented in Table I, and the print-out of the
actual estimated values are given in the succeeding tables.
equation
The
in linear change form with the highest R2 (.74) was
the most aggregative.
Changes in the nominal value of the
imports of goods and services related to changes in the nominal
value of GNP.
The next highest R2 was achieved with the first
step in disaggregation.
Changes in the real value -of goods and
services re1e.;ted to the real value of domestic income, relative prices, and the domestic GNP gap.
The coefficient with the
lowest R2 (.49) was the one with the greatest degree of disaggregation.
The real value of imported goods as a function of
real value of domestic income, relative prices, and the GNP gap.
In general, the more disaggregation in the equation, the less
the explanatory power.
This ordering was also true of the log
linear change form.
If our purpose is to provide an estimate of the overall
level of imports, and we are not directly interested in the
components cif imports for their own sake; these results would
clearly indicate a strong favorable bias toward the most agg-
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Federal Reserve Bank of St. Louis
-5regative equations.
The acid test, however, of the utility of these
equations is how well they actually perform in forecasting.
For
this purpose two of the equations (real and nominal imports of
goods and services) was exposed to a number of ex post dynamic
simulation experiments.
In order to make
the test
as uniform as
possible, the time periods for the simulation experiments were
identical for both equations.
FORECASTING EFFICIENCY
The most straight forward way to 'test the forecasting ability
of alternative import equations is with simulation techniques.
.Simulation requires an explicit division between exogenous and
p cw a 6ut
41-tie h-‘ocia I 61114 dars
endogenous variables and an exact specification of,A the relationships 1Detween them.
In the following simulations the exogenous
variables are monetary policy measured by changes in the money
stock and fiscal policy measured by changes in government
spending.
(Tax variables were not found to be statistically
significant and were, therefore, omitted from the list of
exogenous policy variables).. The accompanying flow diagram indicates the linkages which have been specified and statistically
estimated between the exogenous policy variables and the other
endogenous variables in the model.
The linkages for nominal imports are outlined in the top
panel of the diagram.
Monetary and fiscal influences (measured
by changes in money and government spending) determine the
nominal value of changes in GNP over a period of four quarters.
Changes in GNP in turn determine the nominal value of changes
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Federal Reserve Bank of St. Louis
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- 6 in imports over two quarters.
The linkages for real imports are outlined in the lower
panel of the diagram.
Monetary and fiscal policy determine
the value of changes in nominal GNP (AY).
Given the difference
between actual real output (X) and potential real output (XP)
•
changes in nominal GNP determine the amount of "demand pressure"
(D) in the economy.
The amount of demand pressure and the degree
of inflation expectations (Lpa) will determine the current change
in prices (Lip).
Knowing the current change in prices and the
current change in nominal GNP we cqn determine the current change
in real GNP
ns).
This value feeds directly into influencing
changes in real imports
(AIM ).
Another source of influence on real imports is the GNP
gap (GAP) which is determined from the changes in real GNP and
the assumed capacity of the economy.
The final source of
influence on real imports is the ratio of foreign prices
(meas-
ured by changes in U. S. import prices--Pim) relative to changes
in U. S. wholesale
prices (WPI).
Wholesale prices are deter-
mined by the same factors which determine the general price
index of the economy i.e. demand pressure and inflation expectations.
In evaluating these alternative import models it should
be kept in mind that simulation with respect to nominal imports
requires far less information about the interactions in the
economy than does simulation of real imports.
makes the real import model more realistic.
UnCioubtecily this
However, the price
one pays for realism is -complexity and a greater potential
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Federal Reserve Bank of St. Louis
MIL
for the model to break down because of greater chance that one
link in the chain is defective.
In addition, the real import
version of the model requires a greater amount of exogenous
information.
In addition to knowing the monetary and fiscal
policy values one needs to know the level of foreign prices,
And the capacity of the economy.
Simulation experiments were conducted on both the nominal
and real import models.
The type of simulations performed
were ex post and dynamic.
Ex post, means that the simulations
were performed within the data period used to estimate. the equations,
1953 to 1970.
Dynamic means that the simulations were
allowed to accumulate quarter after quarter and were not updated
periodically to adjust for previous simulation errors.
This in
effect means that if the simulation tends to systematically
error in one direction no actions were taken to put the simulation
back "on track."
Tablell shows the ex post dynamic simulation for nominal
imports and tableIII-for:real.imports.
Simulation was commenced with
the first quarter of 1953 and ran continuously through the first
quarter of 1971.
This is a simulation of 18 years.
The actual
values of the exogenous variables were used while only the
simulated values of the endogenous variables were used in jountly
determining the final simulated value of imports.
It is reassur-
ing to observe that neither import model drifted away from
the actual value of importsir) any systematic wayg However casual
inspection of the alternative simulations would seem to indicate
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Federal Reserve Bank of St. Louis
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Federal Reserve Bank of St. Louis
-8that the nominal import simulation had a superior performance
to the real import simulation.
Apparently the additional
exogenous information used to simulated real imports does not
offset the additional complexity of the real import model.
EX ANTE DYNAtIIC SIMULATIONS
The acid test of any economic model's usefulness is its
ability to forecast the future.
The fact that our two import
models performed reasonably well in ex post simulation is reassuring and indicates that the various elements within the model
interact in a realistic and viable
.of ex
way.
However, the very nature
post simulation within the data period in which the
model was statistically estimated implies that there were no
"structural" shifts in the economic relationships which were
postulated and estimated in the model.
A major uncertainty in
accepting the results of an ex ante simulation is the possibility
that the behavior postulated and estimated within the model
period may change in the period after the model was estimated.
Even a relatively small shift in the behavior of the economic
decision-making units involved can have a potentially large
effect on the forecast.
For example ,a shift in the marginal
propenCity to import from 10
to l2
on the dollar of income
would lead to a 2V6 underestimation in import growth.
There are other pitfalls in ex ante simulations which can
also lead the fo:ecaster astray.
The model will simulate fore-
cast values for the endogenous variables in the model given
specified valued of the exogenous variables in the model.
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Federal Reserve Bank of St. Louis
recast" of the exogenous
If the forecaster errs in his "fo
forecast of the endogenous
variables he will also err in his
perfectly specified and
variables even if his model is
d behavior.
there has been no .change in assume
Internal Stability.
We are interested in forecast
ir own sake but for what
values of imports -- not for the
ernal stability of the
they imply for internal and ext
look at the consequences
economy. In this section we will
next section the consequences
for internal stability and in the
ative policy actions. The
for external stability of altern
es a useful method of
St. Louis monetarist's model provid
tent way, our import
integrating, in an internally consis
oyment rate, inflation,
forecasts with forecasts of the unempl
the economy.
and the amount of unused capacity in
t
If monetary policy is restrictive, i.e., 3 percen
second quarter of 1971
growth in the money stock from the
orts will be at an rnnual
through the end of 1975, then imp
the end of 1975. The
rate of just under $86 billion at
Prices will be falling
unemployment rate will be
year and the gap between
at an annual rate in excess of 1.4%
of the economy will be
potential output and actual output
10.5%.C1ear1y this set of policy
_assumptions will
the labor market and the
lead to unacceptable effects on
y.
level of real income in the econom
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Federal Reserve Bank of St. Louis
.7171.T.R1TAT, C,0T7rCFS
OF ALT=ATIVE POLICIES
Tight Money (M=3)
Imports
Unemp.
Rate
Inflation GAP as % of
Potencial GNP
Rate
1971 IV
64.29
6.1
3.9
7.6
1972 IV
68.3
7.1
2.4
10.4
1973 IV
72.1 ,
7.6
.7
11.5
1974 IV
75.9
7.6
-.6.
11.4
1975 IV
79.8
7.4
-1.4
10.5
Very Easy Money Policy (M=9)
1971 1V
65.8
6.1
4.0
6.5
1972 IV
76.1
5.5
3.7
3.9
1973 IV
87.7
4.8
3.4
2.2
1974 IV
100.1
4.1
3.5
0.0
1975 Iv
113.7
3.5
4.0
-1.6
Moderately Easy Money Policy (=6)
1971 IV
64.8
5.9
4.1
6.5
1972 IV
71.6
6.1
3.2
7.0
1973 IV
79.2
6.1
2.2
6.6
1974 IV
87.1
5.8
1.6
5.7
1975 IV
95.4
5.5
1.3
5.0
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Federal Reserve Bank of St. Louis
•
- 10 At the other extreme, if monetary policy is assumed to
would lead
)
be relatively easy, i.e., money growth of 9%
to the following effects by the end of 1975:
Imports
would rise to an annual rate of just under $114 billion.
The unemployment rate would be at 3.5%.
rices would
continue to rise at a 4% annual rate and the gap between
potential output and actual output would be effectively
zero.
This easy money policy also has unfavorable implications
for the domestic economy.
The 4% inflation is high by
American standards and would be considered economically
and politically unfeasible.
The 3-1/2% unemployment rate
would certainly be acceptable, but it is generally considered
now.among many economists that if the unemployment rate
falls below 4 to 4-1/2%, it would put such intolerable
pressures on the domestic economy as to lead to a cumulative
inflation.
A moderately expansionist monetary policy such as that
implied by a 6% growth in the money stock would lead to
import growth at a rate of about $95 billion at the end of
1975.
The unemployment rate would be down moderately from
its present level to 5.5:3.
Inflation would be effectively
licked with an annual price rise of only 1.3% and the percentage
of excess capacity in the economy at a moderate 5%.
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Federal Reserve Bank of St. Louis
Which of these alternative monetary policies would
ences
be pursued depends in the final analysis on the prefer
of the policy maker.
If he puts a very high priority on
other
reducing dor.esti4 unemployment to the exclusion of all
domestic and international objectives, the expansionary
policy would be appropriate.
If .the policy maker puts
stability
high priority on rapidly achieving domestic price
to the exclusion of all other domestic goals, then the
tight monetary policy would be appropriate.
This would
ably
get inflation down to 1.2% by the end of 1972 and presum
policy could then be eased somewhat.
If the policy maker desired to achieve both a gradual
of
return to price stability with the minimum cost in terms
unemployment, he would choose the moderately expansionary
policy implied in a 6t growth in money.
External stability. To analyze the effects of
alternative monetary policies on the external position
of the U.S. economy, we must not only forecast movements in
imports but also movements in exports and net capital
transactions.
In this exercise, we will ignore the capital
account and focus on rorccasting exports, and the current
account of the balance of payments.
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Federal Reserve Bank of St. Louis
- 14 -
The basic export equation is as follows:
WPI
*
)+0.114Z
in Ex =4.35+0.0183(T)-0.313 in GAP-1.59 ln(
(3.39)
"1
"
(6.05)
(1.47)
(39.92)
(18.21)
2
R = .98
SE = .047
* .
The log of real exports (1nEx ) Is a function of a time
trend (T), the log of the GNP gap (1nGAP) and the log of
U. S. wholesale prices (WPI) relative to foreign wholesale
prices -- which is measured by U.S. import prices (Pim),
Z is a strike dummy.
The realNalue of exports was computed
by dividing the nominal value of exports of goods and services (as measured in the GNP accounts) by the U. S. Wholesale Price Index.
U. S. Export
This deflator was used in contrast to the
Price Index because it is believed to be a more
reliable measure of the price at which exports are sold abroad.
.The time trend is a proxy for foreign demand for U. S.
goods.
The GNP gap is a measure of the nonprice incentives
for exporters to sell at home rather than abroad and the
relative price variable is a measure of the price incentive to
sell at home rather than abroad; Z is a dummy variable which
assumes the value of one when there is a long shoremen's strike
and a zero at other times.
The use of a time trend rather than a measure of foreign
incom3 was decided upon for the simple reason that it is
easier to forecast the time variable in simulation exper5ements
than to forecast foreign demand of income.
As a practical
matter, foreign income has grown at a remar!:ably steady rate
1/ There arc incentives on the part of botI i.. . exporters
and foreign importers to understate in so,ao cases and overLtate in ono): eases the value at which goods are transported.
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Federal Reserve Bank of St. Louis
- 13 variable is a perfectly
over the 50's and 60's and a time
s. In addition,
suitable proxy under these circumstance
ugh the mid-70's would
most forecasts of foreign income thro
efore the explicit
closely approximate a time trend and ther
use of such a variable
would seem to be preferable to its
implicit use.
capture the amount
The GNP gap variable is designed to
of demand pressure in the U. S. economy.
If there is
omy this should lead
substantial amount of slack in the econ
foreign sales and
to an incentive for exporters to increase
vice versa.
The expected sign on this variable would,
therefore, be positive.
The larger the gap in the economy
the higher the level of exports.
The statistically estimated
fortunately not significoefficient has the wrong sign but is
slack in the economy
cant. We can infer from this that the
in export performance.
does not seem to be a significant factor
WPI
ures the standard
The relative price variable (Pim) capt
prices relative to foreign
substitution effect. A rise in U.S.
prices would reduce exports.
The statistically estimated
t sign and is highly
coefficient on this variable has the righ
significant statistically.
have the nominal
For forecasting purposes, we need to
value of exports, and
value of exports rather than the real
Index (PI)must also be
for that purpose the Wholesale Price
the monetarist model,
forecast. As the WPI is generated from
.
the procedure raises no difficulties
In the following simula-
rise at thc same rate
tions, it is asnumod that foreign price!::
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Federal Reserve Bank of St. Louis
FXTERNATL Ctv.I.S7r,Tr77.70F,S OF
ril,TERrATIVF. 1.7r.-17TATtY POLICIES
Billions of Dollars
. 7----t
Tight Money (M[=3)
Exports
Annual.
Imports
Annual
Current Current Acc't
Account Balance % GNP
Balance
.48
5.07
1971
68.05 .
62.98
1972
74.58
66.97
7.61
1973
80.76
70.63
10.13
1.89
1974
86.42
74.42.
12.00
1.01
1975
91.79
78.30
13.49
1.09
.70 .
Very Easy Loney Policy (M.9)
1971
68.16
62.66
5.50
.522%
1972
75.22
72.11
3.11
. .267%
1973
83.16
83.25
-.09
-.007%
1974
91.95
95.37
-3.42
-.241%
1975
101.41
108.55
-7.14
-.458%
Ybderately Easy Money Policy (H=6)
1971
68.14
62.31
5.83
.558%
1972
74.83
'69.02
9-.81
.518%
1973
81.78
76.33
5.45
.452%
1974
88.88
84.08
4.84
.374%
1975
96.34
92.25
4.09
.295%
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Federal Reserve Bank of St. Louis
- 14
•
as U. S. wholesale prices so that relative prices are
unchanged from the fourth quarter of 1970.
However,
because alternative monetary policies imply different
wholesale prices in the United States, the'forecasted
value of exports varies substantially depending on which
policy assumption is made.
at Table 5.
This can be seen by looking
Nominal exports in 1975 arc forecasted to be
about $84 billion under the assumption of tight money.
Exports are forecasted to be $101 billion in 1975 under the
assumption of very easy money policy.
Under both sets of
monetary policy assumptions, real exports (in 1958 _dollars)
are identical at $76 billion in 1975.
The Wholesale Price
Index which is used to compute nominal exports is forecast
to .be 118.0 in 1975, with tight monetary policy
and a
much higher 132.9 with very easy monetary poli-cy.1/
Using the same assumptions about monetary policy as in
the previous section, we can simulate the effects on the
current account.
If monetary policy is tight . (3k;
growth in
the money stock between the second quarter of 1971 and the
fourth quarter of 1975) the current account balance will
1/
It perhaps strains our credibility to assume foreign
wholesale prices will rise not only proportionately
to U. S. wholesale prices, but even proportionally with
respect to alternative assumptions about U. S. wholesale
prices. Obviously, a modification of our simulation
procedure:; allowing for the effect of changing relative
prices on real exports would add more realism to our
forecast. Such a simulation procedure is now being
worked on and will be submittcd MI a later date. We
would assume that alaowing relative prices to very would
tend to make the surplus larger with tight money and the
deficit larger with very easy money.
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Federal Reserve Bank of St. Louis
- 15 be equal to
rplus, which will
su
n
io
ll
bi
5
3.
register a $1
nd, we follow a
, on the other ha
If
.
75
19
by
P
almost IA of GN
k) the curowth in money stoc
gr
%
(9
cy
li
po
ry
very easy moneta
cit by
$7.0 biqion defi
a
of
ss
ce
ex
in
ll be
rent account wi
GNP.
be almost 1/2% of
d
ul
wo
h
ic
wh
,
1975
th in the
ry policy (6% grow
ta
ne
mo
sy
ea
ly
te
If a modera
unt
be a current acco
ll
wi
e
er
th
,
ed
ow
foll
money stock) is
oximately
which will be appr
,
75
19
n
io
ll
bi
t. $4
surplus of abou
GNP in that year.
0.3% of nominal
e internal
e. Taking both th
nc
la
ba
al
rn
te
ex
d
Internal an
mptions
rnative policy assu
te
al
of
es
nc
ue
eq
ns
and external co
monetary policy
the moderately easy
se
oo
ch
to
me
would lead
In terms of
in the money stock.
th
ow
gr
6%
a
by
represented
adual return
would give us a gr
cy
li
po
is
th
s,
domestic effect
ment
ion in the unemploy
ct
du
re
l
ua
ad
gr
a
y,
to price stabilit
ed by
ntial output caus
te
po
of
ss
lo
te
ra
de
rate, and only a mo
pacity. On
full employment ca
s
it
w
lo
be
g
in
nn
ru
the economy
cy would
easy monetary poli
ly
te
ra
de
mo
a
,
de
the external si
oximately 0.5 to
t surpluses of appr
un
co
ac
t
en
rr
cu
lead to
ing current
d gradually declin
an
73
19
jh
ud
ro
th
P
0.G. of GN
through 1975.
account surpluses
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Federal Reserve Bank of St. Louis
- 15 be equal to
ion surplus, which will
register a $13.5 bill
a
e other hand, we follow
th
on
,
If
.
75
19
by
P
almost 1% of GN
y stock) the curcy (9% growth in mone
li
po
ry
ta
ne
mo
sy
ea
very
ficit by
ss of a $7.0 billion de
ce
ex
in
be
ll
wi
t
un
rent acco
almost 1/2% of GNP.
1975, which would be
the
policy (6% growth in
ry
ta
ne
mo
sy
ea
ly
te
If a modera
ent account
, there will be a curr
ed
ow
ll
fo
is
k)
oc
st
money
approximately
1975, which will be
n
io
ll
bi
$4
t.
ou
ab
surplus of
that year.
0.3% of nominal GNP in
balance.
Internal and external
al
Taking both the intern
cy assumptions
es of alternative poli
nc
ue
eq
ns
co
al
rn
te
ex
and
ry policy
moderately easy moneta
e
th
se
oo
ch
to
me
ad
would le
rms of
e money stock. In te
th
in
th
ow
gr
6%
a
by
represented
return
d give us a gradual
ul
wo
cy
li
po
is
th
s,
domestic effect
unemployment
adual reduction in the
gr
a
y,
it
il
ab
st
e
ic
to pr
ut caused by
ss of potential outp
lo
te
ra
de
mo
a
ly
on
d
rate, an
. On
ll employment capacity
fu
s
it
w
lo
be
g
in
nn
ru
the economy
ry policy would
moderately easy moneta
the external side, a
ately 0.5 to
surpluses of approxim
t
un
co
ac
t
en
rr
cu
to
lead
rrent
gradually declining cu
d
an
73
19
h
uq
ro
th
P
0.6% of GN
ugh 1975.
account surpluses thro
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Federal Reserve Bank of St. Louis
OPTIONAL. FORM NO. 10
MAY Ia.2 InFrION
GSA Fentri (41 CFR) 101-11.4
UNITED STATES GOVERNMENT
lt,Oreinorandum
TO
Balance of Payments Project Team
FROM
F. Lisle Widman
Treas
OASIA
B/P Projects
W/D - 17
April 28, 1971
SUBJECT:
Attached is a memorandum prepared by Herbert Grubel
on "The Attainment of U.S. Payments Equilibrium Through
Differential Rates of Price Increases."
This paper has been prepared in connection with
Project D of the Balance of Payments Project Series-the project on adjustment. Mr. Grubel would welcome
comments or suggestions.
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Verbrt G. Grubel
OASIA R.,:scarch
Preliminary
Thr! Attain:IPnt of U.S. Pav:Icnts Eauilibrium
Throuc:h Dj1:12.ercTi-,:faal larcs of FiFice Increases
Economic theory and available statistical evidence
imply that the U.S. trade balance is an increasing function
of the rates at which prices and incomes rise in the rest
of the world, given the corresponding rates of increase
in the United States.
In the following parts of this paper
the empirical evidence on these relationships produced by
Nouthakkcr and Magee (REStat., May 1969) is presented and then
used to provide estimates on price changes required for the
attainment of different levels of a U.S. surplus on merchandise
account under various assumptions about rates of income growth
the U..d SLatt...s c4nd abroad.
I.
Existina Empirical Evidence
Houthakker and Magee based their calculations on tie
following model and data:
log M = a
b
where M
=
Y
us
•
P
r
us
log Y
us
u
(1)
income in constant prices
price index of U.S. imports
index of U.S. wholesale prices
log x = c + d log Y
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) /P )
r us
U.S. imports in constant prices,
= ' .U.S
.
c log
+ e log (P
) + v
/P
xr xus
(2)
ONO
where X
U.S. exports in.constant prices,
Y
r
weighted index of income in 26 countries
importing from the United States,
V
index of export prices of 26 countries,
xr
index of U.S. export prices.
xus
For sources of the data and justification of their use,
see the article, p. 112.
In order to simplify the following
/P .
analysis and projections it is assumed that PR = P /r = P
xus xr
us r
This assumption implies identity of indices of U.S. import
prices and foreign export prices on the one hand and
indices of U.S. export prices and U.S. wholesale prices on the
other.
The assumption probably is realistic in the long run and
whatever deviations that do exist should have relatively minor
influence on the results.
The estimated equations are
54 log PR
Yus
log X = 12.18 + .99 log Yr + 1.51 log PR
log M = 4.98 + 1.51 log
The size of standard errors, correlation coefficients,
••
Durban-Watson rotatistics, etc. are given in the article and are
of no particular interest for the present purposes of
analysis.
The relationships are statistically significant
and theoretically defensible.
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- 3-.
II.
Use of the Evidence
Differentiation of equations (3) and (4) and using the
general fact that elasticity (E
) is defined and mathematically .
derivable as
-= d(log Y)/d(log X) = (dY/Y)/(dX/X)
E
x y
gives
.99 dY /Y + 1.51 dPR/Pr
r r
dX/X
dM/11 = 1.51 dYus/Yu, - .54 dPR/PR
(5)
(6)
•
Therefore, the change in the trade balance (dX
dM) is
equal to
'dX
dM = (.99 of Yr/Yr + dPR/PR) x - (1.51 dYus/Yu, - .54 dPR/PR) M
(7)
Assuming a 1970 level of U.S. merchandise exports of
$43 billion
X = 43 and imports of $40 billion
M = 40, equation 7 becomes
dx-dM - 42.6 dYr/Yr + 86.5 dPR/PR - 60.4 dY /Y
us us
(8)
which can be rearranged into
dPR/PR = (dX-dM - 42.6 dYr/Yr + 60.4 dY /Y )/86.5
us us
(9)
This equation was used to calculate the statistics found
in Table 1.
The four different blocks of figures in this
table apply to different sizes of the merc1iandis0 balance
dX-dM
C at constant prices and levels of $0, 5, 10, 15 billion,
respectively.
In each block the variablcs A = dYr/Yr and
shot/ assumed growth rates of real GNP in the
/Y
us us
rest of the world and the United States, respectively, at annual
= dY
growth rates of 3, 4, 5, G, 7, 8 percent, compounded for five
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-4 Table 1
Simulation of Relative Price Changes
=
.217
11;
49
.1133
123 = .359
.046
.1?9.
.175
.213
.
_
.2'13
.248
B 7 .403
B r: .467
C ECUALS
.016
-.015
-.047
-.078
.lea
.145
.lci°0
.070
.115
.166
.038
.083
.128
.00,
.051
.096
_
5
_
.276
.21 7
.467
.403
.338
•
----
•••••••••
•••••••••••
•••••••••
••••• ••••
•••• •••••
- B = .276
.172
.144
11 r .1:;- 3
• 2c..I.
• / .../ 4
c -rouALs
••••••••••
••••••••
.0:34
.115
6.••••••
••••,••••
•••••••••
.052
...••••••
.021
o
T
•••••••••••
= .159
- B 7 .217
. _
13 = .40 3
_
.....
.148
....
.120
*Ellin
.037
.G78
.122
.167
.212
.245
.261
.319
C 1.011;LS 1 5
.467
R
B
9
.21 7
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.2PG
.24 7
ti
.111
7 77
.4 -4 1
.17S .
.21
.259
_4.303
n
30
14-9
. 3 09
.2:7,0
?7 3
.319
1113
.15!.;
201'
.211 1
.333
I
.12C,
.211
25b
.301
.US4
.0:35
. 13E,
.175
.225
.270
years and giving the shown growth factors of .159, .217,
.276, .338, .403 and .467.
Thus, the f:tatistics should be interpreted as follows.
Assuming that the United States desires a surplus of $5 billion
on merchandise account in 1971 prices by the end of 1975 and
that the rest of the world and U.S. real incomes grow at a compound
rate of 6 and 4 percent, respectively, then the re,l.ative
price change required dPR/PR = .043. .This figure is circled
in Table 1.
d(P /P )/(P /P
r us
r us
that given price indices in 1971 in both regions equal to
It is recalled that dPR1PR
100, the 1975 ratio of Pr' us = 1.043.
Under the assumption
that U.S. wholesale and export prices will have risen an
average, non-compounded 2 percent per year, export prices in
the rest of the world will have had to rise at an average
non-compounded rate of about 3 percent.
i.e. P = 1.043* Pus = 1.043-110 = 114.73
r
dP = 14.7 for S years
r
The $5 billion surplus will be worth $5.5 billion in U.S.
prices and $5.7. in rest of the world prices.
Negative ntubers shown in Table i indicate that the desired
merchandise balance can be attained with the growth of U.S.
prices exceeding thoL;e abroad.
As can be seen, this takes place
at low U.S. surpluses and high foreign and low U.S. real income
growth rates.
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-6 III.
Tnternrotat5on and Projections
This section is not complete and the text contains only
suggestions for further work which can be carried out after
the validity of the basic calculation has been checked and
the suggestions are considered to be worthwhile.
1)
Projections
An estimate of required price developments can be made by
using projections of U.S. growth and price changes and foreign
growth made elsewhere.
Similar projections can be made by
assuming that the relative rates of growth in the United States
and the rest of the world over the past decade will be repeated.
2)
Elasticities
The calculation can be used to show the sensitivity of
the required relative price changes to assumptions about the
real rates of growth.
Thus, measure on one axis the rate of
foreign GNP growth and on the other the required rate of price
changes and plot the functional relationship for different
U.S. growth rates and merchandise surpluses.
3)
See Figure 1.
Interpretations
Estimate the relationship between wholesale, export
and consumer price or GNP deflator indices in the United States
and obro - A.
If there arc systematic relationships, all of the
calculations and discussions can be reinterpreted to show the
effects on the trade balance for the more commonly used inflation
measures.
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......
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4)
Further !%!fincm2nts
The Houthakker and Magee article has estimates of
income and price elasticities of U.S. trade with about 15
individual countries.
The basic estimate presented above could
be refined by the use of these country statistics.
However,
the value of the refinement depends critically on the
availability and accuracy of forecasts for GNP growth in these
countries.
Moreover, certain difficulties exist in breaking
down the all-over foreign price effect into its individual
country components.
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April 27, 1971
OPTIONAL POHM NO. 10
MANW2MMON
UNITED STATES GOVERNMENT
e7norandU712
TO
:
Balance of Payments Project Team
FROM
:
F. Lisle Widman
A
SUBJECT:
Treas - OASIA
B/P Projects
WD - 18
April 28, 1971
Canadian Trade Equations
undertaken to
Since November 1970, work has been
exports to nnd imports
formulate demand equations for U.S.
e export and import
from Canada as a part of the worldwid
has included both
forecasting exercise. The process
ad hoc attempts to
and
ions
ulat
a priori theoretical form
s were introduced
specify the equations. Numerous vdriable
trial basis and were
in the regression equations on a
of t-tests on their
s
retained or excluded on the basi
llinearity observed
coefficients, or indications of multi-co
ched paper by
atta
The
in the simple correlation matrix.
h
houg not exhaustive)
Robert C. Fauver contains a review (alt
been examined. Mr. Fauof the various approaches that have
ents and suggestions for
ver would appreciate critical comm
future refinements.
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Robert C. Fauver
CANADIAN TRADE EQUATIONS
An Interim Status Report
This paper is designed to review various approaches
to the problem of formulating demand equations for U-S.
exports to and imports from Canada.
The fundamental
variables entering import demand functions have been
discussed in the literature, so therefore their theoretical foundations are quite well known and will not he
discussed in this paper.
Comparison with OBE Equation
a.
Eliminate time trend.
The use of a time dummy in the Treasury-OBE equation
leaves much to be desired.
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Generally speaking, time dummies are
- 2 employed in regression analysis to represent some unspecified
parameter or parameters in the system.
They are used, for
instance, to represent technological changes or structural changes
that took place over the period of observation.
Thus, the dummy
variable represents a parameter for which quantification is
impossible.
In essence, the dummy removes linear trends that
appear in any of the independent variables.
This across-the-board ?
trend removal is extremely unappealing in that the trend (e.g., a
trend in the relative price ratio) could be peculiar to the
particular time period being analyzed.
For forecasting purposes,
there are no a priori reasons to expect such a trend to continue
into the future.
It seems much more logical to specifically eliminat6 trends
(linear or log) from only those variables that, one would expect
on a priori grounds to be subject to trends.
Thus, one would not
expect a trend in a capacity utilization variable or in a relative
price variable (at least in thellong run run).
The Treasury-OBE
form of the demand equation includes the time-trend dummy.
Thus,
it removes even adventitious trends from any or all of the
independent variables.
For these reasons, the time dummy has been
discarded from our Canadian regression estimations.
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- 3..
b.
Use of non-seasonally adjusted data.
Prior (and present) attempts by Treasury-OBE to forecast
exports and imports utilize seasonally adjusted data.
This
data has undergone seasonal adjustment performed by the Bureau
of the Census X-11 seasonal adjustment program.
On the basis '
of an article by Jim Stephenson of the Fed specifically evaluating
the Bureau of the Census X-Il seasonal adjustment method and
several conversations concerning the general.concept of seasonal
adjustment it was decided to construct equations utilizing nonseasonally adjusted data.
The major problem with seasonal
adjustment programs concerns the degrees of freedom digested by
the methods of adjustment (e.g., the X-11 uses approximately
3M-1 d.f. for each adjusted variable in the regression equation,
where M = the periodicity of the data).
The alternative of using
quarterly dummies was therefore tried on a priori and statistical
"purity" grounds.
Inclusion of a supply variable.
Until recently, most attempts at forecasting trade balances
considered only the demand side of the problem.
Unless one argues
that the supply of exportables is infinitely elastic, then the
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e
supply of exportables, at least theoretically; should be included
in forecasting trade balances.
including supply constraints.
Two basic approaches exist for
A simultaneous equation system
produces the more Complete method of considering both supply and
demand conditions.
A secondary approach is to postulate a proxy
independent variable that can be included in the basic demand
equation.
The assumption is that the proxy captures the major
elements of supply constraints on the ex-post dependent variable.
In the case of trade with Canada, including a measure of
capacity utilization in the regression equation may satisfactorily
capture the supply effects.
For example, one postulates that
the level of exports to Canada is affected not only by demand
variables but also by the availability of exportables.
Hence
one could include a capacity utilization variable to measure the
effect of U.S. demand pressures on the availability of goods for
export.
Ideally, one would include as the independent variable a
measure of capacity utilization in the export sector.
On a priori grounds one -would expect the sign of the capacity
utilization coefficient to be negative.
This would indicate
either that some sort of a queuing system exists where domestic
orders are filled before foreign or that domestic suppliers left
foreign orders unfilled during periods of high capacity utilization.
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04,
- 5 •
It is possible, howevever, that our close ties with Canada
may obscure the supply effects.
For instance, if the two
economies follow similar cyclical trends, then during boom
periods, the increased Canadian demand for imports may swamp
the supply effects.
In this case, the sign of the regression
coefficient may be negative or insignificant.
U.S. Exports to Canada
Given the assumption of a positive marginal propensity to
import, one would expect a positive correlation between
Canadian income and imports.
Should the structure of imports
be heavily weighted by manufacturing goods then one could expect
a stronger correlation to exist between industrial production
and imports.
Secondly, there probably exists a correlation between demand
pressure in Canada and Canadian imports.
As the Canadian economy
approaches full capacity utilization, the demand for imports
increases.
Similarly, during recessions, domestic suppliers
likely replace foreign suppliers.
This capacity utilization
relationship rests, in part, on the assumption of imports being
substitutes for domestically supplied goods
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Federal Reserve Bank of St. Louis
4101.
MD
Depending on the relevant price elasticitiei, the relative
movement of Canadian prices vis-a-vis U.S. prices should help
to explain U.S. exports to Canada.
On similar grounds, the
movement of U.S. prices in relation to other foreign suppliers
.could be expected to alter the supply source of Canadian imports.
The prices included in the demand function should be then U.S.
export prices, world export prices, and Canadian prices.
In
practice, however, wholesale prices are often substituted for
export prices due to data limitations.
The ability to import depends to some extent upon the
availability of foreign exchange.
One would expect, a priori,
that the availability would exert a greater impact on less
developed countries than on developed countries.
Various methods
exist for introducing a proxy for foreign exchange availability
into the explicit demand function.
Given the dominant role of
the U.S. in Canadian external trade, U.S. imports from Canada
could serve as a proxy for foreign exchange availability.
Official foreign exchange reserves could also be used.
The
choice, here, lies in the decision of whether it is the stock
or the flow of foreign exchange that affects imports.
U.S.
direct investment in Canada could be entered into a demand
function to serve two purposes.
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First, direct investment could
serve as a proxy for foreign exchange availability.
Secondly,
to the extent that subsidiary firms import capital equipment,
semi-finished goods, or processed goods, it captures part of the
effect of direct investment on Canadian demand for U.S. exports.
The basic Canadian import demand function suggests then that
U.S. exports to Canada are a function of Canadian income or
industrial production, some measure of capacity utilization,
relative prices (Canada and U.S.) relative supplier prices
(U.S. and rest of the world), U.S. direct investment, U.S.
exports from Canada, and the exchange rate.
As a basic reference point, the Treasury-OBE world export
equation was applied to the specific case of U.S. exports to
Canada.
The basic forecasting equation purports that exports
depend on industrial production, imports, direct investment
capacity utilization, relative prices, and time.
The result
-2 statistic, several
obtained from this run had a satisfactory R
non-significant t-tests on coefficients of individual independent
variables, a low Durbin-Watson statistics, and multicollinearity
among several of the independent variables.
Appendix A of this paper contains the results of several
"better" equations obtained during this excrcise.
Depending on
one's preference for purity some of these cquations give better
equation.
fits than what we consider to be the "best"
,
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Perhaps
- 8
for forecasting purposes one should not worry about the use of
seasonally adjusted data or a time dummy variable.
Such a choice,
however, necessitates the addition of several caveatslo the results.
Our "best" equhtion appears below.
It regresses the level
of exports on various independent variables.
The figures in
parentheses below the coefficients are t-test ratios.
(1)
X = 1438.6 - 1.02USGAP + 0.051 GAGNPt
(6.67)
(1.68)
i24.9)
10.8CAU
t-2
••••
(5.63)
02 - 28.503
10.6RPt_ i + 0.09DIt_ 2 + 69.101 + 135.5
(4.54)
(1.33)
R2 = .972 F = 246.5
DW = 1.62
(2.05)
(5.97)
SEE BAR = 39.4
(1.07)
SPCBAR = 4.13
ws:
The independent variables are as follo
USGNP
USGAP - The ratio of actual to potential
CAGNP - Canada GNP
n
CAU - Canadian canacity utilizatio
prices indices
RP - ratio of US to Canadian wholesale
to Canada
DI - US total direct investment flews
X - US non-agricultural exports to
Canada
01, 2, 3, Quarterly dummies
(adjusted for
SnEBAR - Standard error if the estimate
degrees of freedom)
for degrees of
SPCBAR-- percentage standard (adjusted
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freedom)
All of the variables have the hypothesized signs and with
the exception of U.S. direct investment, the coefficients are
significantly different from zero.
The coefficients for the
supply effects variable (USGAP) is significant only at low
It does, however, carry'a negative sign
confidence levels
indicating that as domestic demand pressures increase the level
of exports declines.
This would seem to substantiate the queuing
concept discussed earlier.
Since the coefficient of direct investment was not
significantly different from zero, equation (1) was reestimated,
omitting direct investment as an independent variable.
The
following results were obtained:
A
(2)
X
1502.0 — 1.01USGM) + 0.052C7GNP — 1144CACAUt=211.21.Pt_i
(25.5) s
(1.65)
(6.98)
+ 70.001 + 141.0Q2
(2.06)
K2
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= .971
(6.27)
F=277.1
(6.10)
(4.81)
30.1Q3
(1.12)
SEEBAR = 39.7
SPCBAR — 4.16
DW = 1.61
- 10 In order to obtain rough estimates of the price and
income elasticities pertaining to exports to Canada
equation (2) was . reestimated in double log form.
The
coefficient of relative prices was -1.37 and the coefficient
on Canadian GNP was 0.64.
An alternative specification of the samealemand function
appears below:
+
25.94RPt_l+ .11DI
:
11.1CAUt
t-2
(3) X* = 660.7 + .10CAGNP*
(2.68)
(6.38)
(6.52)
(2144)
(1.47)
661.0 + 115.9Q + -117.4Q
2
3
1
(2.90)
-112
(7.07)
= .895
r =
(5.20)
68.1
SEEBAR = 41.0
DW = 1.90
Where:
X* = deviations from log trend of exports
CAGNP*
= deviations from log trend of Canadian GNP
Here again direct investment is insignificant but the
coefficient carries the hypothesized sign.
carry the expected coefficient signs.
All of the variables
The amount of the variation
ion
in the dependent variable that is explained by this specificat
is inferior to the amount explained in (1).
The demand pressure
ant.
variable (USGAP) was tried but was found to be insignific
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Federal Reserve Bank of St. Louis
U.S. Imports from Canada
Many of the problems connected with estimated U.S. demand
for Canadian exports are similar to those discussed above
concerning the Canadian demand for our exports.
we are merely looking at another
Rather obviously
demand for imports, hence
the same theoretical arguments are applicable.
Similarly, the
reservations expressed above concerning the use of a time-dummy
variable, seasonally adjusted data, and the exclusion of supply
considerations in previous OBE-Treasury work are still held.
Our estimation equations shall therefore exclude a time-dummy
variable, use seasonally unadjusted data (with quarterly dummies
to remove fluctuations), and attempt to include supply conditions
variables (or proxies).
' The following is our currently preferred equations:
1045.8
(4.29)
- 41.3Q
(1.02)
-2
R =
.986
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Federal Reserve Bank of St. Louis
+
8.27GNP
(36.6)
+ .91 GAP
(1.13)
+30.2Q2
(1.16)
+
F - 606.8
-
12.4RP
(4.83)
-
11.2CAUCA
(4.38)
28..3Q3
(.926)
SEEBAR = 39.8
SPCBAR = 3.99
D.W.
1.09
U.S. imports from Canada excluding autos
M
Where:
GNP
=
CL?=
RP
=
U.S. Gross National Product
Potential - actual GNP
U.S. wholesale prices divided by Canadian
wholesale prices
CAUCA
=
Canadian capacity utilization
Q 1,2,3
=
Quarterly dummies
coefficient
At first glance, the relative price term's
appears to possess the wrong sing.
The negative sign, however,
e elasticity.
is probably the result of an inelastic pric
In
applies to the
this case, the negative coefficient merely
the real level. .
money level of imports, and not necessarily
price elasticity the
If Canadian prices rise, given an inelastic
money level of imports will also rise.
exception of
All of the variables are significant with the
icant but also has
the GAP variable, which is not only insignif
the wrong sign.
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Federal Reserve Bank of St. Louis
OASIA
Treas
B/P Projects
WD-19
April 28, 1971
Robert D. Browr.
To:
From:
Subject:
Balance of Payments Project Team
F. Lisle Widman
U.S. Imports of Natural Gas from Canada
Attached is a brief study of U.S. Imports of Natural
Gas from Canada which has been prepared by Robert D. Brown.
Mr. Brown has initiated several studies of the structure
of U.S. demand for "raw material" imports from Canada in
an attempt to draw a picture of U.S. raw material trade
with Canada to 1975. He plans to look at the following
items: crude petroleum, natural gas, newsprint, wood,
iron ore, ferrous concentrates and scrap, non-ferrous
ore and concentrates, and nickel.
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Federal Reserve Bank of St. Louis
Mr. Brown would appreciate comments and suggestions.
OASIA
Treas
B/P Projects
WD-19
April 28, 1971
Robert D. Brow.
U.S. Imports of Natural Gas from Canada
Summary
Our imports of natural gas from Canada jumped several
hundred percent in 1958 with the opening of a U.S.-Canadian
pipeline.
Because gas is sold to U.S. purchasers under
long-term contract (generally 25 years) there is little
short-term variation in price.
Consequently, price plays
essentially no part in determining short-term demand.
In
trying to "explain" the variation of U.S. gas imports, I
therefore classified explanatory variables into three groups:
1.
U.S. short-term demand determinants such as
industrial activity,
2.
long-term factors to explain the upward trend
in gas imports, and,
3.
variables determining the U.S. supply of natural
gas.
In 1968 and 1969 our imports of gas increased by 35 percent.
Previous years' increases had been around 10 to 15 percent.
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Federal Reserve Bank of St. Louis
- 2
ONO
The jump in demand is generally attributed to short U.S.
supplies as evidenced by declining proven reserves of
natural gas.
While gas production increased during 1968
and 1969, reserves fell for the first time in the industry's
recent history.
There is little likelihood of increasing
domestic reserves during the next five years because of the
slow pace of exploration.
Therefore, our imports of natural
gas from Canada are expected to increase considerably through
1975.
The precise monetary effect this will have on the
balance of payments is difficult to determine because our
trade figures value imports at "local market value" which
may or may not approximate the cost to U.S. purchasers under
long-term contract.
It seems reasonable to assume though
that these value figures are a rough lower limit on the U.S.
dollar outflow for imports of Canadian gas since Canadian
law provides that domestic producers cannot export at a
price lower than that charged to domestic customers.
The
Canadian government also sets limits on the amount of gas
which may be exported based on estimated surpluses of gas
reserves over anticipated needs.
However, the Canadian gas
industry is expanding and appears well able to meet our gas
requirements for at least the next few years.
Results of Regression Analysis:
The explanatory variables I tried were:
A.
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Federal Reserve Bank of St. Louis
Economic activity indicators:
1,
Federal Reserve Board Manufacturing Production
Index (MPI)
- 3 _
2.
U.S. Capacity Utilization Indicator
3.
New Construction Activity (deflated with index
of construction costs)
4.
B.
C.
New Housing Units (NHU)
Long-term growth Indicators:
1.
Total U.S. population (POP)
2.
Number of Households
Domestic Supply Indicators
1.
Volume of domestic gas production
2.
Volume of domestic gas reserves
3.
Volume index of domestic proven reserves (DGR)
4.
Per capita production of natural gas
5.
Per capita reserves of natural gas
The dependent variables were annual Census Bureau figures
for the volume and local market value stated in U.S. dollars
of natural gas imported from Canada from 1958 through 1969.
Regressions against all likely linear and log linear
combinations of the explanatory variables provided only one
set of equations with reasonable fits, regression coefficients
and forecasts of future imports.
The "best" fit included a
constant term and two variables:
1.
( 30.27 POP - 18,50 DGR
VOG = -3,392.40 )4
and
2.
Where:
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Federal Reserve Bank of St. Louis
VAG + -841.777 / 7.695 POP - 4.937 DGR.
VOG = volume of gas imported in billions of cubic feet
VAG = value of gas imported in millions of U.S. dollars
(local market value)
- 4 POP = U.S. population in millions
DGR = 1958 based index of estimated proven U.S.
natural gas reserves.
All regression coefficients were significantly different
from zero at the 95% level and 95% confidence limits did
not change their signs.
The multiple 13
nificant for both equations.
was 96% and sig-
The Durbin-Watson statistic
indicated no auto correlation problem.
Attached are
charts which show the closeness of fit, forecast volumes
and values of annual imports through 1975, and 95% confidence
limits on the predictions.*
The equations forecast an average
15% increase in imports during the next few years.
This is
slightly higher than the Federal Power Commission's 1969
estimate of an 11% annual increase.
For population figures
for 1970 through 1975 I used Census Bureau projections.
For 1970-1975 domestic gas reserves I assumed that reserves
would continue to decline at 6%, the average rate of decline
since 1968, since relief of our domestic reserve shortage
seems unlikely because of the lead time required to find
and market new gas reservoirs.
A real problem in this analysis was the shortness of the
time series.
This left little flexibility in dealing with
collinearity or autocorrelation in equations involving more
than real explanatory variables.
On the other hand my main
purpose has been to "predict annual imports through 1975
based on the key variables rather than to develop a more
detailed demand model which working with quarterly data
might allow.
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Federal Reserve Bank of St. Louis
The fact remains that population growth providds
,/
-5-.
the most reasonable explanation for the upward trend in gas
consumption and imports, and that the key factor in our
future needs for gas imports from Canada now appear to be our
own decreasing gas reserves.
* The 95% confidence limite on the predictionsf Yi,are:
A
Yilt Bs) tk, .975
Where S
a= the variance of the predicted Y,
• :I
J.-
•••111.
s
+11 thir/ed
X
2
Y)
5`
N
The matrix ...
E (Y. - c)2
N
(X1X11 X
K
1 -1
(X X)
is the
K
variance - conariance matrix of the regression coefficients.
N = number of observations
K = number of dependent variables including the intercept.
t ,.975 is the 95% t distiibution value for N - K degrees of freed°
k
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Federal Reserve Bank of St. Louis
Actual
Volu=e
Year
Predicted
Lower
Volume Conf.Limit
1958
71.349
50.464
1959
90.762
78.140
1960
102.687
156.073
1961 •
153.258
220.153
1962
332.502
263.960
1963
361.895
319.181
1964
376.356
363.651
1965
395.000
400.277
1966
410.131
449.382
1967
499.096
490.018
1968
584.013
592.393
1969
751.156
744.513
1970 Xp)1034.000
920.426
1971
1094.601
1972
1267.181
1973
1438.312
1974
1608.137
1975
1776.796
(p)preliminary figure
-60.741
-27.550
52.780
119.155
164.414
219.930
263.204
296.799
344.583
382.420
487.686
614.308
738.896
853.762
. 964.807
1074.131
1182.641
1290.807
••
.
„..,
.;11.i:•
.. L.: '
."..
' •: •'
. .
' •
:
• •
:
!
161.669
183.829
259.367
321.152
363.506
418.382
464.098
• 503.755
554.182
597.615
697.101
874.718
1101.956
1335.441
1569.554
1802.493
2033.632
2262.785
:••t.::i •
•
, •, .
1-1.•
I
:
' ••
::
4
.17 71-771,..:1!•
•• •• •
"i • • •.:
• .;
••,,
1 1'•
.•
Upper
Conf.Limit
.11. .1.1
•
"
;i..
•:.
•.171!
•.
- •
1!
t•:
irT
,
771,
-177
t.
I
i
1
11
• !
I 11
1&58
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Federal Reserve Bank of St. Louis
59
62
63
64
65
66
100
P.O.
too IA vs
P. Pros-t1
J.?II..
P
v
P., 2
r •06.004
IS4
f ; • !!
,
6,/, I Rp
“‘,4•1" IAA., VA...A
,
Pdt
to, ••4•0
•
0
A-1-5
(?'illions of U. S. Dollars)
...... .....7....____-____............... . :..1:.:;1..:.
•:11
Reserves
U. S. Irports of Natural Gas
1'5b-75
.. -11
• .....
r l :!:.,...t.i..:• 19
:!:!4!!!:. ":::".'
..:. :: ..:-.:
, L,.:..,,.; .
::,-17 .1
!
- 2r ; i i i.:• :i. i !i LT-:::
ur,,z)
i, ,
. .0'.1,.: :. :i.,:,:, . ,i!-:.:.-.,a.:. t. . 7:. . .7.T
.
---,--- . : I
....
1.
:
_
:
.
,
4
.
_
•
•
,
:
:
:
.
Limit
11'
: ,,...
f.
,
1: 1 :
:': iii:.7::7I
1 :Ii.t:!iTh .I!:;:1:::'I
',r._.• . •
-..:.... ",•,..
!
30,545 , -LLHC7
:•4;'!
. .,:., . ,.•.•.!.,1. ...r.-., -7,-- • .:15
t i . -L,.. ••••:.-.---43.402
.
.
,•••••••••:7-7-r
•
•
62.496 i
,.:, H I:: -:.;... . . .
1:..
--•-•---- •-•---..4. -. 4
77.838 r-7-rr •
,
.
.
.
-._%.
.......!
:
7
:
.
7
.
:
....-...
.,_...,"..A.
83.052
:
....1,...:1. ....i.:._.•.........
1,,..:;:?--.:.:.•
L :17'
,
101.646
112.799
122.403
3
•.••,..• .. . . .••....•-•
:,
.....d iT7Li;'.,,....11 1 !,,..
134.960 . ,,. .1
ifri
lit;
,.....-••,, -::.: „*
•
.-1.
.! ,
145.675 1 :P; .., ti, H/1
. '..;:.!.1-k•r4 ''• ,_..
!I .:! r'i'''''• •'144
;1;:i!!!! il1 ......
171.472 ' .1::i :;4! I. lill 1 _; • :!;:
' Hi Ili! .,,- i..,;(!; ,
217.765 I Ii'•
t W.1 HI ll ; tt ! !I, '• :
.,,..,.„. „.„.,.
,..;....,
''
-"irl!ii
!hit'C.!:,'
-..,
,
1
1
276.575 i 111 Il
pil ! ill •
Ti..T. al..1..L 2
. ... -•-•
i.., i,...'Hit:
i.. i,,! 0;
Op , r- 1 ii ,1,.. c.i.../1 , it !!1; It it
336.942 1 WI
!!',i 11i1 li!!;.
oil "li,,It ..,i; ..i.1-1.1!...
:.,1 ,11.11, il1 1,, : fi mi il ! iiii! ipi
. ! :pill
397.429 4 !!1:1! 4i i l l.: ifii.
:,:. ,:.• ......._
:,, :1.• .....
'
.1..
.
,
,
_44
,
tui
.,..
1A ;II! .r.P.457.53241
i. . ,
..
.,, ., ..,...„.
,i4:„.;.
517.240 . •:: li: Iti
'.'•
it
i
'
11..,
!!1!
Pi.
ill!
576.359
I
* II 1 t! III' II, !Ill II !(ill!I
I l!' 1.,; ,!ii !iliiiii! Ail:.it
11 1 1 1,i1 lilt I'll MI I ! l'it I:II 'I hull
li I'
;1 .,.:1 .1.1 i", '11'
Iii II 1 II 1 111 it! li 1. tit. 0 I ill' Oil
.
.....
... .
c Gas
-841.778 / 7.695 u.S. Population - 4.937 Domesti r-j.:1:::::r• .; ..211: !:;::11:
(value stated in $ million) .rITT71-1---•
Valuo
I.
Lower
Limit
Predicted
Value
Actual
ValUe
vcar
-10.155
10.195
15.224
1058
-10.485
16.453
13.793
1959
9.830
36.163
21.469
1060
26.342
52.090
37.183
1961
37.297
0.674
73.323
1962
51.066
76.356
09.723
1963
61.535
87.192
90.564
1964
69.643
96.023
90.697
1965
81.526
102.213
97.639
1966
90.814
118.244
.120.933
1967
113.035
144.773
139.097
1963
151.377
124.571
137.333
1969
124.020
230.203
1970 (p)2504.451
214.145
275.544
1971
243.259
320:344
1972
271.097
364.739
1973
300.294
403.767
1974
328.569
452.464
1975
(p) preliminary ficure
,H ' :•,:: '1,H: 1.''._
'7.-
7 "I. •
I.' :!7
.1
I : 17
.
I.
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:::!
• 17..iji
i
1 7L:
• 1
--71-t"t7777T"7-
.
:. .. • ,.: :.:. .., T ... ;.... , .. ....,.. • ..'..;i.• • • .,.--- ----.---"-------.--,-.7-7 7
6
. ..
:. • :[ ' •
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-r--7T'.7"-... ;. -.• - .!-.. .. .1, •''i :..1
1:
I:: :',.i:i:I 12:' !•
'' t-r:
. -I
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-714
. 77"7717
7!
VALUE'''
......!
. !....:
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. 1
.. . .
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1
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;
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Federal Reserve Bank of St. Louis
59
60
61
62
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iliirtl/iiirTholl
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:h
10
••„,
OAI:
Treas
B/P Projects
WD-20
April 23, 1972
Robert D. Bra:
To:
From:
Subject:
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Balance of Payments Project Team
F. Lisle Widman
U.S. Imports of Newsprint from Canada
Attached is a brief study of U.S. Imports
of Newsprint from Canada (1948-75), which has
been prepared by Robert D. Brown. Mr. Brown
has initiated several studies of the structure
of U.S. demand for "raw material" imports from
Canada in an attempt to draw a picture of U.S.
raw material trade with Canada to 1975.
Mr. Brown would appreciate comments and
suggestions.
Treas
°ASIA
B/P Projects
WD-20
April 28, 1971
Robert D. Brown
U.S. Imports of Newsprint from Canada
(19484.75)
The purpose of this paper is to investigate the major
determinants of U.S. demand for newsprint imports from
Canada with the intent of forecasting U.S. annual imports
of newsprint through 1975.
In a 1969 article* D. D. Detomasi published results of
a study in which he concluded that the U.S. price elasticity
of demand for Canadian newsprint was somewhere between -.5
and -.8.
Hbwever, Department of Commerce authorities on
the pulp and paper industry argue that price plays no important part in determining the quantity of newsprint imported into the U.S. because most Canadian producers are
associated with or are owned by major U.S. publishers or
paper companies.
Naturally, the U.S. partnts turn to their
. own Canadian sources first in meeting their newsprint requirements.
In any case, real prices paid are negotiated on an
individual contract basis and are usually not made available
to the public.
Thus, announced prices are considered
indicative only at an upper limit on real newsprint prices.
However, a new factor reducing the Canadian share of the
growing U.S. market is the rapidly increasing capacity of
southern U.S. newsprint producers who hold no interest in
Canadian production and who are able to capture a regional
*"The Elasticity of Dcmand for Canadian Exports to the United
States", D. D. Detomasi, Canadian Journal of Economics, Vol. 3
August, 1969. pp. 416-921.
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Federal Reserve Bank of St. Louis
- 2 market by providing area users an assured long-term supply.
While Canadian newsprint is of higher quality it is vulnerable to transportation
, delays because of strikes and weather.
Thus, it would seem that the quantity of newsprint
imported would be a function of population growth or other
trend factors, cyclical economic activity and U.S. production
of newsprint.
In regression analysis I tried following explanatory
variables:
(USPOP)
1.
(annual Bureau of Census data - 1948-70).
U.S. population
to account for the general
upward trend in the economic activity indicators
2.
Economic activity indicators
(ADLIN)
a.
newspaper ad
(NEWSAD)
b.
newspaper ad index
(MAGAD)
c.
magazine ad index
USNNP)
d.
U.S. net national income
(USPPR)
3.
linage
Volume of U. S. newsprint production
Dependent variables were the volume and quantity of newsprint
imports from Canada for 1948-'70.
Of the 15 or so statistically acceptable equations
generated by linear and log linear regresFdon of tonnage of
newsprints imports against various appropriate combinations
of these variables the following equations seemed best in
terms of demonstrating the effects of all three major determinants, i.e., trend, cyclical. activity, znd the U.S. supply.
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Federal Reserve Bank of St. Louis
-3-
-
'1)* VOL = -4729.219 + 1.779 ADLIN + 38.753 USPOP
- 1.025 USPPR
(1432.62)
(1366)
(9.7143)
(.303)
2
R = .93 F = 81.54
D.W. = 1.7584
2)* VOL = 4.330.0827 + 100.318 TREND -.9078 USPPR
(245.027)
(40.377)
(.396)
(Numbers in parentheses are standard errors.
952 confidence limits on the
regression coefficients are approximately B. / 2.093
(S.E.
)
Bi
2
R = .909 F = 60.39
+
3.431 USNNP
(1.38)
D.W. = 1.755
Both equations product forecasts of newsprint imports in 1975
of about 7 million tons.
95% prediction limits on this fore-
cast range from approximately 6.5 million tons as a lower
limit to 8 million tons as an upper limit.
(The method of
calculation of prediction limits is uhown in my paper
on
natural gas imports.)
Regressions of values of newsprint imports against
the
same combinations of variables produced no equations
which
included explicitly trend, cyclical, and domestic suppl
y
factors.
The best of the statistically acceptable equations
was:
3) VAL = 128.554 + 3.42 NEWSAD + 2.948 MAGAD..0673 USPPR
(21.72) (.477)
(.324)
(.0281)
2
R = .986 F .= 438.19
D.W. = 1.89
* Regression coefficients estimated after 1st order
Markov scheme
transformation to reduce autocorrelation of the residuals.
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Federal Reserve Bank of St. Louis
- 4 This as well as most of the other value equations
projected the value of 1975 newsprint imports at about
$1.1 billion current U.S. dollars.
The above equation
generated a forecast of $1.146 billion with prediction
limits of $1.087 to M204 billion.
Houever, as always, predictions are only as good as the
underlying assumptions and estimates of the "explanatory"
variables in the forecast periods.
Specifically, I have
assumed that 1971 will be the bottom or near bottom of the
current recession and that domestic economic activity will
increase dteadily through 1975 with about a 3% average rate
of inflation.
Should the rate of inflation be higher one could reasonably
expect the nominal value of newsprint imports to be higher but
because the volume of newsprint imports appears to be essentially
unrelated to price I would not expect the rate of inflation
to have a direct impact on the volume brought in.
Thus,
unless the economy fails to recover at a steady pace (the
assumption underlying projected values for advertising linage
and U.S. newsprint production) newsprint-tonnage can be
expected to reach the seven million mark .by 1974 or 1975.
Attached are graphs showing actual volumes and values of
newsprint imports and forecasts generated by the equations
described in this paper.
Attachments
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Federal Reserve Bank of St. Louis
NO. 32.110. 10 01•12.0N0 PR INCH (100 DIVISIONS)
DV 2 31j-iNcH CYCLER RATIO puLip.“)
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.C3XinnIa
Volume of U. S. imports of newsprint from Canada
IN STOCK
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Federal Reserve Bank of St. Louis
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OFT$ONAL FORM HO. 10
MAY 10e.11DITION
GSA Prh4r4 (4s corn)
'0,A
UNITED STATES GOVERNMENT
Memorandum
TO
: Deputy Assistant Secretary Cates
FROM
: Jerry M. Newman
SUBJECT:
DATE:
May 25, 1971
U. S. Financing of Major Canadian Projects and Impact
on Canadian Balance of Payments
Several Canadian proposals have just recently surfaced
which co.ald set the tone of U. S.-Canadian financial relations
in the 1970's. These involve plans for developing in Canada
several major hydroelectric projects and a gaseous diffusion
plant, which would necessarily have to be financed in large part
by foreign capital.
The largest of these is the proposal rather suddenly
announced by Quebec Prime Minister Bourassa several weeks ago.
Bourassa indicated that Quebec intended to proceed with plans
to develop a major hydroelectric power complex in the north at
James Bay. According to the limited information available the
complex would require a total capital investment of $6.0 billion
spread over ten years. Press reports indicate Con Ed might well
contract for 20% of the 10 million kilowatts to be produced at
James Bay. Quebec is proceeding with itssLudies of the project
which they hope to complete by the end of the summer, with work
on the project to commence shortly thereafter. The U. S. Embassy
informed me today that the National Assembly of Quebec has already
appropriated $26 million to begin the infrastructure work connected with the project.
Nova Scotia and New Brunswick authorities announced several
weeks ago that their provinces were also formulating plans to
erect major hydroelectric complexes using waters of the Bay of
Fundy. These projects could be combined. The Nova Scotia proposal
would reportedly require financing in the neighborhood of $2.0
billion.
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Treasury - OASIA
B/P Projects
WD-24
May 27, 1971
OPTIONAL rOM NO. 10
MAY 11-.0 t1,1710,1
GSA rroAR (41 C_PYt) f01-11.11
UNITED STATES GOVERNMENT
Memoranclum
Balance of Payments Project Team
TO
FROM
:
SUBJECT:
DATE:
May 27, 1971
F. Lisle Widman i
fit
U.S. Financing of Major Canadian Projects and Impact
on Canadian Balance of Payments
Attached is a memorandum prepared by Jerry M. Newman
which notes plans currently under consideration in Canada
which would materially affect that country's balance of
payments with the U.S. These plans involve resource
development for export to the U.S. which will be financed
to a large extent by U.S. capital.
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Federal Reserve Bank of St. Louis
Buy U.S. Savings Bonds Regularly on the Payroll Stich&Tian
2 According to an article in the Financial Times of Canada:
"Both the Fundy project and James Bay have, until recently,
been considered unlikely areas for immediate development. Costs
were held to be uneconomically high in both cases. In addition,
Fundy's technical problems are formidable and James Bay is both
distant and isolated.
Political pressures combined with a power shortage in the
U. S., apparently pushed the three provinces into changing their
cautious attitudes. But none of them is close to final arrangements on technical details or financing."
The British Newfoundland Corporation (perpetrators of the
$1.0 billion hydroelectric project at Churchhill Falls, into
which U. S. capital of over $0.5 billion will ultimately flow)
has also recently sought COC sanction of a proposal to construct
a gaseous diffusion plant which could cost another $1.0 billion.
. While the'financial plans for these projects have not yet
been worked out, it is generally acknowledged that foreign
capital in the magnitude of several billion dollars would have
to be solicited to help finance these projects, much of which
would have to come from the U. S.
It is increasingly clear that U. S. requirements for raw
materials and energy will alone generate proposals for large
scale projects in Canada in the coming years, which would imply
substantial input of U. S. capital. These cases would seem to
have the effect of increasingly minimizing the effect of the
exchange rate on the Canadian balance of payments by increasing
the proportion of price inelastic trade in Canada's export sector.
Thus the adverse impact on Canada's price elastic exports of a
higher exchange rate could be largely offset by the expansion
of its price inelastic exports. An example of U. S. financing
of export oriented projects in Canada was the recently approved
plan for a $300 million expansion of the Iron Ore Co. of Canada
to produce ore for the major U. S. steel companies which own
IOC. In addition to Ex-Im Bank financing of the U. S. content,
U. S. insurance companies are to provide $150 million of the
project's total cost.
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Federal Reserve Bank of St. Louis
-3-.
These new proposals for hydroelectric plants and a gaseous
diffusion plant are now under serious consideration in Canada.
The nature of the financial arrangements which are worked out
for these projects may set the pattern for other large scale
projects which will surely follow and will in large part determine the level of U. S. capital flows to Canada in the 1970's.
While it is difficult to argue, for example, that Con Ed should
look to U. S. sources for electricity, there is also the question
of whether the U. S. balance of payments can tolerate unlimited
over-draft rights for Canada to develop these resources.
Regarding the latter point, we have prepared some informal
and rough estimates of the Canadian balance of payments position
for the period 1971-75, in connection with the Treasury study
for C.I.E.P. on the U. S. balance of payments. These are attached
as Tab A.
Our projections call for a strong Canadian trade position
throughout the period, but large interest and dividend payments
should result in a current account deficit for the period as
a whole. Continued substantial borrowings of long-term capital
are' likely and the basic surplus could average about $000 million
annually.
These estimates do not include any financing for
projects now under consideration, but reflect what we
estimate as a "normal" level of borrowing by Canadian
and. general budget or "program" financing by Canadian
the large
would
companies
provinces.
The estimates of the Canadian trade surpluses might be
somewhat on the low side, especially if the deterioration in the
automotive trade account were to continue. We have assumed that
no major new capacity will be installed in Canada and that sourcing
in Canada will not increase appreciably. Since Canadian plants
are now approaching optimum capacity utilization, we have assumed
a small 4'/' annual increase in Canadian automotive exports and
over-all trade balance in this sector.
Because of these assumptions our estimates of Canada's
trade surplus are somewhat lower than implied by the trend
lines for exports and imports (Tab B). Extrapolation of the
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Federal Reserve Bank of St. Louis
-41961-70 trend in exports and the 1961-69 trend in imports (both
ex atktos) would result in a trade surplus of $2.5 billion in
1975 (vis our estimate of $1.6 billion). This would raise the
basic balance surplus from $1.2 billion to $2.1 billion.
The Canadians claim they have not made any projections; of
their balance of payments, but now admit that there has been
a structural change in the balance of payments. They informally
estimate that this year's current account surplus will reach
$750 million (down from $1.2 billion in 1970) which if realized
will mean a basic balance of at least $1.5 billion (vis $2.0
billion in 1970).
We would not anticipate any significant change in the
proportion of the Canadian .surpluses which can be attributed
to the bilateral position with U. S. which has remained fairly
steady in recent years.
Assuming this factor does not change appreciably (after
adjusting for the statistical discrepance in the two countries
data) the U. S. payments position with Canada (on a U. S. basis)
which would be implied by our projections for Canada's global
balance of payments could develop as follows:
($ U.S. millions)
1971
1975
Trade
Current Account
Long-term Capital
Basic Balance
-1,800
-685
-550
-1,235
-1,000
600
-1,400
-800
(- equals U. S. debit)
Implementation of several large projects in Canada during
this period would probably add several hundred million dollars
to the capital outflow projected for 1975 and the U. S. bilateral
basic balance deficit could exceed $1.0 billion.
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Federal Reserve Bank of St. Louis
- 5..
You may wish to flag this issue to Messrs. Volcker and
Petty. Perhaps a U. S. policy is required on financing major
projects in Canada, in view of their implications for the U. S.
balance of paymrnts. One approach would be to limit IET exempt
financing by the U. S. to the U. S. content of these projects
only.
cc: Messrs. Widman, Schaffner and Reynolds
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Federal Reserve Bank of St. Louis
CANADA
Balance of. Payments Projections
(millions of dollars)
Actual
1970
Trade Balance
Current Account Balance
Lona-term Capital
Basic Balance
Source:
2,865
1,240
777
2,015
1975
A.
1972
2,785
1,500
950
1,235
1,600
2,500
935
-425
-1,150
-1,000
-675
225
550
900
1,250
1,650
1,900
1,900
1,485
475
100
650
1,225
2,125
1970 Data - OECD Secretariat
1/ Projection based on leg linear
extrapolation.
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Federal Reserve Bank of St. Louis
Forecasts
1973
1971
1974
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Treasury - OASIA
B/P Projects
WD-25
May 27, 1971
OPT,ONAL FORM 040. 10
MAY !K2 EDIT)04.4
GSA FPMR (41 CrPt) 101-11.4
UNITED STATES GOVERNMENT
•
Memorandum
TO
Balance of Payments Project Team
FROM
F. Lisle Widma,n v
DATE:
May 27, 1971
1-1‘
SUBJECT:
U.S. Imports of,Woodpulp from Canada
Attached is a brief study of U.S. Imports of Woodpulp
from Canada, which has been prepared by Robert D. Brown.
Mr. Brown has initiated several studies of the structure
of U.S. demand for "raw material" imports from Canada in
an attempt to draw a picture of U.S. raw material trade
with Canada to 1975.
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Mr. Brown would appreciate comments and suggestions.
Buy U.S. Savins,s Bonds Regularly on the Payroll Savings Ptan
U.S. Imports of Woodpulp from Canada
There are three basic uses of woodpulp: (11
for making
making building
general and specialized types of paper, (2) for
.
materials, and (3) for making textiles and synthetic fibers
For
and strengths of
each one of these uses there are many grades
pulp, each being sold at a different price.
About 96% of our
total pulp
recent pulp imports have come from Canada, but our
onsumption.
imports account for only 5 to 10% of our total pulpcc
due to
Canadian pulp is most valued for its greater strength
its longer fibers.
The rest of our pulp imports are from
Scandinavia and are for highly specialized uses.
Thus, U.S.
demand
demand for Canadian pulp is partly residual, that is,
to meet
left over after U.S. production capacity has been used
where only
domestic pulp demand; and partly specialized, i.e.,
comparable
long fiber pulp will suffice and cannot be found at
prices domestically.
•••
Therefore, the hypothesis I have used in forecasting U.S.
a function
imports of wopdpulp is that the quantity imported is
ve
of domestic economic activity, relative prices, and relati
supply conditions in the U.S. and Canada.
Finding a variable
because of
to represent relative prices has been most difficult
the lack of actual price data.
Published price series are
than price
generally either "posted prices", which are no more
ceilings established within the industry, or unit values
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— 2 —
obtained merely by dividing aggregate "quantities" of pulp
imports by aggregate value figures.
Neither series adequately represents the actual prices
observed by decision makers.
However, it is thought that pulp
prices in the U.S. and Canada often fluctuate in response to
increases in capacity over demand so that, for example, as Canadian
capacity increases faster than U.S. capacity one might expect
Canadian pulp prices to fall or not rise as fast as U.S. prices.
Also, if Canadian capacity increased more rapidly than U.S.
capacity one might expect Canada to meet more residual U.S. demand
not met by domestic production.
To account for these factors
in U.S. demand for Canadian pulp I have computed a first-of-year
ratio of total Canadian pulp production capacity to U.S. capacity.
Also, part of the relative price structure observed by U.S.
importers naturally depends on the exchange rate which fluctuated
over much of the period from 1948 to the present and so I have
6naluded the Canadian/U.S. exchange rate, expecting that changes
in the ratio would be positively correlated with changes in pulp
imports.
I also tried U.S. pulp capacity utilization as indicators
of domestic supply tightness, but they generally tested
insignificant.
indicators:
I have tried three different economic activity
(1) current net national income, (2) the index of
industrial production, and ad linage in 52 major U.S. cities.
Ad linage seems most directly relevant to pulp imports because
it is a significant indicator of demand for paper, as well as a
sensitive indicator of general economic activity.
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3, ...
To explicitly account for trend I tried using either
U.S. population or a simple linear trend variable.
Since my objective is forecasting rather than demand
equation identification per se I have ignored the possible
identific ation problem arising out of U.S. ownership of pulp
production facilities in Canada.
However, the signs of all
coefficients fit the hypothesis I stated above in my explanation
of the choice of explanatory variables.
Statistical criteria for acceptance of a given
regression were 5% Theil-Nager table limits for the DurbinWatson ratio and standard t-Table tests for the regression
coefficients.
Out of all economically plausible regressions
of the above listed variables the following linear equations
were statistically acceptable.
Q-Quantity of pulp imports in millions of
tons. V-Value in
millions .of U.S.
Kos. h & 6 are log
linear equations.
S.E.ts in ().)
1 --2
3
h
5
-14.298 .033
(.882) (.015)
Q
Q
•
Q
Ln Q
v
2
R
D.W.
_
3.1615
(.7140)
.001
.00026)
A
-4.3211 .12L
1.95
.062
(1.05) (xio)
(.70/4)
(.0Th)
-11.L62
(1.665)
0.0
—636.25
103.07)
-
.00
(.000)
1.5211
(.811)
1.05
:J07)
3.07
(.14514)
.205
(.01)
2.19
A
2.20
A
.071
.0176)
2.00
.906
1.66
1.679
(.1169)
323.536
(103.125
.933
1.736
t
6
Lu V
0.0
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2.07
(.177)
1.05
.902
(.06)
1.7t3V9
The assumptions made in quantity forecasts were:
1.
Population would increase over the next
few years ab about 1% annually.
2.
Canadian pulp production capacity would increase
slightly to about 50% of U.S. capacity based
on current estimates of industry expansion plans.
3.
The U.S. dollar would depreciate vis-a-vis the
Canadian dollar by about 3% to about l$Cn/1$ U.S.
Forecasts using alternative rates of 1.10$Cn/1.00RU.S. and
.90$Cn/1.00$U.S. are also shown.
Equations 45 and 46 generate forecasts of the value of pulp
imports -- based on the assumption that:
1.
Real GNP will grow at about 4% over the next
four years and ad linage will grow at the same
average pace.
2.
The Canadian/U.S. exchange rate will follow the
course indicated in the assumptions used for
the quantity forecasts.
As Table I shows, the elasticity of demand with
respect to the exchange rate for the given estimates of equation 3
is about .45: while the constant elasticity estimated by equations
4 and 6 is 1.05.
Least squares estimating techniques with available
data enable one only to assert with confidence that any of the
elasticities estimated here lie somewhere between approximately .08
and 2.024.
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- 5 Alternative exchange rates have a slightly greater effect
bin total value forecasts of equation 5 (see Table B)
but since exchange rate movements probably do not correspond to
price movements it is worth while seeing what the forecast
quantities shown on Chart I would be worth with alternative unit
values.
Table C shows what each quantity forecast at alternative
exchange rates would be worth given unit values ranging from $125. U.
to $140.
In terms of current pulp price prospects the average
unit value of pulp imports could be expected to level off between
$135 and $140.
Assuming that the Canadian/U.S. exchange rate
stays in the present range around 1:1.
Table III shows that
(given these assumptions) pulp imports in 1975-would be valued at
$550 to $580 million.
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Federal Reserve Bank of St. Louis
OASIA
Robert D. Brown
5/25/71
TABLE A
•
_
Effects on 1975 Pulp Import Quantity Forecast'
of Alternative Exchange Rates
$Canadian:$U. S.
.900/1.000
1.000/1.000
Millions of tons
3.945
4.128
% Change in tonnage
4.64
1.100/1.000
4.311
4.43
TABLE B
Effects on 1975 Pulp Import Value Forecasts2/
of Alternative Exchange Rates
$Canadian:$U.S.
.900/1.000
U.S. $millions
47701620
% Change in value
1.000/1.000
509.5157
6.78
1.100/1.000
541.869
6.35
TABLE C
3/
Total Pulp Import ValuesUnit Value Alternatives ($U.S./Ton)
1975
Tonnage
Forecasts
3.945
'
$125.
'$130.
$135.
$140.
Addumed
Exchange
Rate
$493.125
:512.85
532.57
552.300
$Cdn.900/$1.000
.4.128
$516.000
536.64
557.28
577.920
$1.000/$1.000
4.311
$538.875
560.43
581.985
603.540
$Cdn.1.100/$ 1.0
I/ Equation No. 3
2-/ Equation No. 4
3/ Equation No. 3 forecasts of quantity at differen
t
exchange rates.
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@FedFRASER