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MOD ELLI NG U.S. SERVICES TRA DE FLOWS: A COINTEGRATION-ECM APP ROA CH by Juann H. Hung and Sandra Viana Federal Reserve Bank of New York Research Paper No. 9518 August 1995 This paper is being circulated for purposes of discussion and comm ent only. The contents should be regarded as preliminary and not for citatio n or quotation without permission of the author. The views expressed are those of the author and do not necessarily reflect those of the Federal Reserve Bank of New York or the Federal Reserve System. • Single copies are available on request to: Public Information Department Federal Reserve Bank of New York New York, NY 10045 Modelling U.S. Services Trade Flows: A Cointegration-ECM Approach by Juann H. Hung• Sandra Viana July 15, 1995 International Macroeconomics Function Federal Reserve Bank of New York 33 Liberty Street New York, New York 10025 * The authors thank colleagues at FRBNY, especially Howard Howe, Tom Klitgaard, and Jim Orr for helpful comments. The opinions expressed in this paper are those of the authors and do not necessarily represent those of the Federal Reserve Bank of New York or of the Federal Reserve System. Modelling U.S. Services Trade Flows: A Cointegration-ECM Approach Abstract The U.S. service surplus soared from near zero in 1985 to about $60 billion in 1992, offsetting about two thirds of the goods trade deficit. Could this merely reflect improvement in data collection? Or does this mean U.S. services industries are more competitive internationally than goods industries? Is the services surplus likely to continue to rise? This paper estimates a forecastable model of U.S. services trade to address the above questions. We find that data improvement actually had a negat ive net impact on the services surplus, since it affected imports more than exports. Instead, the surge in the services surplus was mainly due to strong foreign growth and, to a lesser exten t, dollar depreciation. An increase in either outward or inward foreign direct investment asset (FDIA) has a significant and positive impact on both exports and imports of other privat e services, but has only a modest net effect on the U.S. services balance. Thus, the outloo k for the U.S. services balance largely depends on the growth prospect of foreign econo mies. Keywords: Services trade; Tourism trade; Other private servic es; Royalties and license fees; Merchandise trade; Foreign direct investment Modelling U.S. Services Trade Flows: A Cointegration-ECM Approach Juann H. Hung Sandra Viana I. Introduction As services industries grow more important to natio nal economies, they also feature more prominently in international transactions and nego tiations.' U.S. services industries, in particular, have complained loudly in recent years abou t foreign trade barriers. Despite the perception of trade barriers, however, the U.S. servi ces surplus has soared since 1985, both in nominal and real terms (Charts I). Rising from near zero in 1985, the services surplus reached about $60 billion in 1992, offsetting about two-thirds of the merchandise trade deficit. Since l 992, the services surplus has managed to stabi lize around $60 billion, while the merchandise trade deficit has deteriorated sharply as a result of weak foreign demand and a robust U.S. economy. In contrast to merchandise trade flows, which are the subject of voluminous studies, U.S. services trade flows have received relatively little empirical analysis. 2 Prior to the mid1980s, research on U.S. services trade may have been scarce because of the noneventful movement and small magnitude of such trade. The unprecedented surge in the U.S. services surplus since 1985, however, has changed the scena rio completely. Given the present For example, the subject of removing barriers to trade in financial services featured prominently in the Uruguay Round world trade nego tiation and continues to be a central issue confronting the World Trade Organization. 1 2 The services model run by the staff at the Board of Governors of the Federal Reserve Systein is one of the rare exceptions. See Helkie and Stekler (I 987) and (1992). • magnitude of the services surplus, a comprehensive study of services trade flows enhances not only our overall understanding of U.S. international competitiveness, but also our ability to forecast U.S. external balances. This paper uses data since the advent of the floating exchange rate (1973) to estimate a forecastable model of real nonmilitary and nontransportation services trade between the United States and the rest of the world. The services account consists of five components: military, transportation, tourism, other private services, and royalty and license fees (Table I). Among them, tourism, other private services, and royalty and license fees are the fastestgrowing components. Consequently, our study focuses on identifying the determinants of tourism, and other private services (including royalty and license fees). 3 Military and transportation services are briefly described in the appendix. One question often raised regarding the rapid rise of the services surplus has been whether it mainly reflects better data collection. · There is no question that, because of improvements made by the Bureau of Economic Analysis (BEA) in recent years, services trade data has frequent breaks. Unlike merchandise trade data, which are collected when goods enter and leave a country, services data largely rely on surveys or estimates and thus are subject to frequent revisions. Moreover, these revisions tend to be carried back over a 3 Because the distinction between other private services and royalty and license fees is not clear in some areas, we decided to combine the two subaccounts in our analysis. For example, beginning in 1986, certain management fees received from or paid to unaffiliated foreigners--amounting to less than $25 million for receipts and less than $5 million for payments--have been removed from royalties and license fees and included in other private services. 2 limited number of years, thereby causing data discontinuity. 4 On the whole, the revision of a service subaccount tends to expand its scope of coverage, causing an upward break. To account for the impact of data improvement, we examine the BEA's data documentation and include a dummy variable for each data break in our regression analysis. Our analysis uses the two-step (cointegration and Error Correction Model (ECM)) approach suggested by Granger and Engle (1978) to avoid spurious regressions, since both (real) service exports and imports appear to be nonstationary variables. We find that tourism trade is primarily driven by economic activities and the real exchange rate. The movements in other private services are mainly a function of economic activities, the real exchange rate, outward direct foreign investment assets (FDIA), and inward FDIA. Overall, our models fit the data very well within sample and out of sample. Data improvement is estimated to have applied more to imports than to exports. Thus. it has had a negative net impact on the services surplus. Had the data coverage and estimation method remained the same as in 1982 over the entire sample period, the services surplus rise would have been even greater than what is reported. Once data breaks are accounted for, the surge in the U.S. services surplus since 1985 appears to be mainly the result of strong foreign growth and, to a lesser extent, dollar depreciation. An increase in outward or inward FDIA has a positive impact on both exports and imports of other private services. Consequently, the net effect of inward and outward FDIA was much more modest than that of economic activity, even though inward FDIA grew dramatically in the second 4 Typically, in June of each year, estimates of U.S. international transactions are revised to incorporate new source data, improved methodologies, and changes in definitions. In addition. a new benchmark survey is usually conducted every five years. 3 half of the 1980s. The next section of the paper describes the stylized devel opments in the fastestgrowing components of services trade since the mid-1980s. Section ill estimates the fundamental determinants of the trade flows of tourism and other private services (including royalty and license fees). Section IV presents conclusion s. II. The Stylized Facts This section examines developments in the three fastest grow ing service components since the mid-1980s: tourism, other private services, and royaliies and license fees. II.A. Tourism5 On the export side, tourism has surpassed all other servic es components since 1986, accounting for about 40 percent of total service receipts in 1993 (Table 1). The rise in tourism imports has been somewhat less spectacular. Neve rtheless, tourism imports remain the largest component of service imports since the late 1970s , accounting for roughly 40 percent of total service imports in 1993. In net, tourism has been the fastest growing component of the services balance since 1986, reaching $22 billion, or 38 percent of net U.S. servic e exports in 1993 (Table 1). According to reported data, however, the prominence of net tourism is a relatively recent phenomenon. Until 1989, U.S. net tourism had been runni ng a deficit (Chart 2). The rise in U.S. tourism exports occurred mainly vis-a-vis Western Europe, Canada, Japan, and Mexico (Table I). In 1986, Japan was the only country with which the United ~ The tourism trade is the sum of two accounts: travel and passenger fare. 4 States ran a bilateral tourism trade surplus. However, West ern Europe and Canada have been catching up rapidly since the late 1980s. In fact, the Unite d States has been running a tourism surplus with the other three regions as well since I 992. II.B. Other private services "Other private services" (OPS) is a conglomerate account that covers transactions with both affiliated and unaffiliated foreigners in services that are not related to either tourism, military, transportation, or royalties and license fees (Tabl e 3). 6 Net OPS was the largest surplus component of U.S. servic es balance before the late I 980s; however, mainly because of the surge in net touris m, its share of total services balance has gradually declined. Nevertheless, net OPS continues to account for about 39 percent of total services balance in 1993, exceeding all other servic es components. Net OPS has continued to rise steadily since the late 1980s , albeit not as strikingly as net tourism. This rise reflects the persistence of net expor ts to unaffiliated foreigners. Most of the unaffiliated accounts have run a surplus since I 986, with telecommunications, insurance, and advertising being the only exceptions. Net exports of the "business, professional and technical services" account have been the fastest-growing since 1986, accounting for roughly half of total net exports to unaffiliate d foreigners in 1992. Net exports of education services have also risen steadily since 1986. In comparison, net exports of financial services, which grew solidly during 1986-89, have declined modestly since 1989. 6 Exports of "other private services" to affiliated foreigners refers to the services of tangible property supplied by U.S. parent companies to their foreign affiliates and by U.S. affiliates to their foreign parents. Exports of other priva te services to unaffiliated foreigners refer to a host of services listed in Table 3: education, finan cial services, insurance, telecommunications, and business, professional, technical services. 5 Net OPS exports to affiliated foreigners have also been steadily running a surplus , even though their importance has been declining (relative to net exports to unaffil iated foreigners). It is not surprising that U.S. parent companies' exports to their foreign affiliates have constantly exceeded their imports from their foreign affiliates. Interestingly, foreign companies' affiliates in the United States have also been net exporters of service s to their parents. U.S. parents' net exports to their foreign affiliates accounted for about 80 percent of total net OPS exports to affiliated foreigners since 1986, while U.S. affiliates' net exports to their foreign parents made up the remaining 20 percent. 11.C. Royalties and license fees Similar to the "other private services" account, the "royalties and license fees" (RLF) account covers transactions with affiliated and unaffiliated foreigners in a numbe r of services (Table 4 ). 7 Net RLF ran a steady and solid surplus not only throughout the 1980s but also into the 1990s. Over the 1992-93 period, net RLF reached an average of $14.6 billion -about 26 percent of the U.S. services balance. Over the 1990-92 period, net receipts from affiliated foreigners accounted for about 83 percent of total net RLF, while net receipts from unaffiliated foreigners accoun ted for the remaining 17 percent. Table 4 shows that in 1992 the bulk of net receipts from unaffiliated foreigners (71 percent) came from industrial processes. Foreign parents have generally been net exporters of royalties and license service s to 7 Receipts from affiliated foreigners stem from the sale and rental of proprietary rights and intangible assets supplied by U.S. parents to their foreign affiliates and by U.S. affiliates to their foreign parents. Receipts from unaffiliated foreigners stems from sales of patterns, trade secrets (related to industrial processes), and copyrights (for books, records and tapes), royalties on broadcasting and recording of live events, and franchise fees. 6 their U.S. affiliates. Similarly, U.S. parent companies have been net exporters to their foreign affiliates. However, net RLF received by U.S. parents (from their foreign affiliates) have far exceeded that received by foreign parents (from their U.S. affilia tes). Indeed, mainly because of the substantially higher net receipts by U.S. parents (than that by foreign parents), the United States has historically run a persistent surplus of royalt ies and license fees. Given the less-than-ideal state of intellectual property right protec tion so far, it is perhaps of no surprise that net RLF on "books, records, and tapes" have only registered a dismal $0.1 billion over the.1989-92 period. More surprising is that the United States has been a net payee of "broadcasting and recording of live events " fees to unaffiliated foreigners, not a net recipient as commonly held. This puzzling phenomeno n may have to do with the fact that the sales of "broadcasting and recording of live events " to foreigners are largely transacted by foreign affiliates of U.S. companies. While the size of these transactions is potentially large. they are not recorded in the balance of paym ent accounts because they are not cross-border transactions. III. Empirical Analyses This section estimates the fundamental determinants of trade flows of tourism and other private services (including royalty and license fees). Becau se all the dependent and independent variables are I( I) variables (Table 5), we use the two-step estimation method suggested by Granger and Engle ( 1987) to avoid spurious regres sion analysis. In the first step, long-run equations are estimated using ordina ry least squares (OLS) regression. The residuals of these regressions are tested to see if they are stationary. If the 7 null hypothesis that the residuals are nonstationary can be rejected, the long-ru n equation is considered to be cointegrated. 8 In the· second step, after long-run cointegrated equations are estimated, an error correction model (ECM) is estimated to study short-run dynam ics between the variables. In each regression, we use a constant dummy for each documented data break. III.A. Tourism Demand for tourism is assumed to be determined primarily by economic activity and the real exchange rate, much in the same way as demand for goods. That is, demand for exports is expected to increase as foreign economies grow and/or as the real dollar depreciates; demand for imports is expected to increase as the U.S. economy grows and/or the real dollar appreciates. Regression analyses of both real tourism exports and imports are conducted over the 1973Q4-1993Q4 period. To deal with data breaks, two constant dummies are included in both exports and imports regressions. The first one, for the 1984Ql-1993Q4 period, accounts for the effect of new estimates introduced for passenger fares (for both payme nts and receipts) and travel (only receipts). 9 The second, for the 1991Ql-1993Q4 period, accoun ts for the effect of improved estimates for travel from Canada. 10 For real exports, two measures of the real exchange rate are used: the relative export 8 In a cointegrating regression equation, the nonstationary dependent variable and nonstationary independent variables drift together over time, so that the unexpl ained "residuals" of the regression equation are stationary over time. 9 10 See Survey of Current Business, June 1993. See Survey of Current Business, June 1994. 8 price (= U.S. service export deflator in foreign currency terms/foreign GDP deflator) 11 and the relative CPI (foreign CPI/US CPI in foreign currency terms). The regres sion results using both measures are reported in Table 6a. Regression I (first column) shows the regression results using the relative export price, while regression 2 (second colum n) shows the results using the relative CPI. Table 6a shows that different measures of the real exchange rate do not make a marked difference in the regression results. Both long-run regressions are reasonably cointegrated: one has an Augmented-Dickey-Fuller (ADF) statistic of 4.92, the other has an ADF of 4.67. Both equations have an Adjusted-R2 = 0.99. A I percen t increase in foreign domestic demand raises real tourism exports by about 2.2 percent in regression 1, and by about 2.3 percent in regression 2. A I percent increase in the relativ e export price lowers real tourism exports by about 0.42 percent, while a I percent decrease in the relative CPI (or real dollar appreciation) lowers real tourism exports by about 0.36 percen t, in the long run. For forecasting purposes, we also estimate the error correction mecha nism (ECM) for both regressions. To see which regression has better forecasting perfor mance, we reestimate each equation using data over the l 973Q4-l 99 I Q4 period, and use the resulting coefficient estimates to make out-of-sample forecast (over !992Ql-1993Q4). We then compute both the (out-of-sample) root-mean-square error (RMSE) and Theil's inequality coefficient (Theil's 11 Ideally, one should use the relative tourism export price( = U.S. tourism export deflator in foreign currency terms/foreign GDP deflator). However, tourism export deflator is not reported. 9 U) 12 for each model--the combination of the long-run equation and ECM. The results indicate that the two models' forecasting performances are equally good by Theil' s U standard, although model 2 forecasts slightly better than model I by the RMSE standard. The insample and out-of-sample forecasts of model 2 are plotted in the upper panel of Chart 3. For real imports, two measures of the real exchange rate are also used: the relative import price (= U.S. service import deflator/U.S. GDP deflator), and the relative CPI (foreign CPI/US CPI in foreign currency terms). The regression results using both measures are reported in Table 6b. Regression 1 shows the regression results using the relative import price, while regression 2 shows the results using the relative CPI. Table 6b shows that, in contrast to tourism exports, using different measures of the real exchange rate does make a noticeable difference in the regression results of tourism imports. Although the two regressions do not differ notably in terms of cointegration statistics and goodness of fit, 13 the coefficient estimates of the fundamental variables in the two regressions are quite different. A I percent increase in U.S. domestic demand raises real tourism imports by about I percent in regression I, and by about 0.8 percent in regression 2. A 1 percent increase in the relative import price lowers real tourism imports by about I percent, while a I percent increase in the relative CPI (or real dollar depreciation) lowers real tourism imports by about 0.4 percent, in the long run. 12 Theil's inequality coefficient (Theil's U), which always falls between 0 and I, can be considered as the normalized RMSE. If U = 0, there is a perfect fit. If U = I, the predictive performance of the model is as bad as it possibly can be. 13 Regression 1 has an ADF = -5.62 and adjusted-R2 = 0.99, while regression 2 has an ADF = -5. 17 and adjusted-R2 =0.98. 10 Again, we estimate the ECM for both import regression s, and reestimate each equation using data over the I 973Q4- I 99 I Q4 period to forec ast over I 992Q 1- I 993Q4. Both the RMSE's and Theil's U's indicate that model 2 forec asts slightly better than model 1. The insample and out-of-sample forecasts of model 2 are plott ed in the lower panel of Chart 3. To ascertain why the two measures of the real exch ange rate make a greater difference on the import regressions, we estimate the following two typical exchange-rate-pass-through equations: (1) The tourism export price equation: ln(PxS) = 0.1 I + 0.98 ln(S) + 1.04 ln(P) -0.02 ln(P' ) ( 1.38) (62.98) (34.40) (0.96) Adjusted-R 2 = 0.999; Phillips-Perron (Z,) = -3.34, ADF = -2.97. (2) The tourism import price equation: ln(Pm) = 1.78 - 0.52 ln(S) + 1.03 ln(P) + 0.13 ln(P' ) (14.8) (21.6) (21.89) (4.81) Adjusted-R 2 = 0.995; Phillips-Perron (Z,) = -5.16, ADF = -4.95. Where. pxs= U.S. service export deflator in foreign currency terms ; S= the effective foreign currency/dollar exchange rate based on tourism export weights; P= U.S. GDP deflator; p'= tourism-export-weighted foreign GDP deflator; and pm= U.S. service import deflator. 11 The tourism export price equation suggests that, holding U.S. and foreign prices constant, a I percent dollar appreciation will raise the relative export price by about I percent over time. Such an estimate suggests that nominal exchange rate changes are nearly completely passed through to tourism export prices in the long run. It also helps explain why the relative CPI and the relative export price are estimated to have roughly the same impact on tourism exports over time. The tourism import price equation suggests that, holding U.S. and foreign prices unchanged, a I percent dollar appreciation will raise the relative import price by about 0.5 percent over time. The low exchange-rate-pass-through coefficient in the import price equation helps explain why the relative CPI is estimated to have much less impact on tourism imports than the relative import price. Several features of the tourism trade regressions are worth noting. First, foreign income elasticity for exports is twice as large as U.S income elasticity for imports in tourism trade. This favorable asymmetry of income elasticities suggest that real net tourism exports will have a tendency to grow unless the U.S economy sufficiently outgrows its trading partners' economies. Second, compared with merchandise trade, tourism trade seems to be less sensitive to exchange rate changes. 14 Tourism exports, however, respond much more strongly to foreign growth than merchandise exports. Indeed, the favorable income elasticity asymmetry in tourism trade is the opposite of the case in merchandise trade, which is known to have a 14 The average estimate is about I for both U.S. merchandise export price elasticity and import price elasticity. 12 larger income ell)sticity (of demand) for imports than for exports. 15 Third, U.S. import price elasticity is more than two-times larger than export price elasticity, suggesting U.S. tourists are much more price conscious than their foreign counterparts. However, because export prices (in foreign currency terms) respond more completely to dollar exchange rate changes than do import prices, the net effect of a dollar exchange rate change on tourism exports is roughly equal to that on tourism imports (in absolute terms). III.B. Other private services This subsection estimates equations of real other private services (including royalty and license fees) exports and imports. For easy reference, real other private service s (including royalty and license fees) will be referred to as OPS in the subsequent discussion. OPS had three major data breaks since 1973. The first occurred in 1982QI, when receipts and payments of royalty and license fees began to be reported on a gross basis rather than on a net basis. 16 The second occurred in I 986Q I when (I) coverage of education services and business, professional, and technical services were included for the first time, and (2) certain portfolio incomes were reclassified to other private services. 17 The third occurred in I 991 QI, when benchmark survey results led to new estimates for other private services receipts and payments. 18 15 See Goldstein and Khan ( I 985) for a survey of price and income elasticities of demand for U.S. merchandise exports and imports. 16 See Survey of Current Business, September 1994, footnote 5. 17 See Survey of Current Business, June 1989. 18 See Survey of Current Business, September 1994. 13 Among t~e three data breaks, the first one is potentially the most difficult to deal with. We thus run both real OPS exports and imports regressions over the 1982Ql-1993Q4 period. A constant dummy is used to account for each of the remaining two data breaks. We assume that demand for OPS is a function not only of economic activity and the real exchange rate, as in tourism, but also of outward and inward FDIA. OPS exports is expected to be a positive function of both outward and inward FDIA. Growth in outward FDIA is expected to increase OPS exports, since exports of professional, insurance, and legal services may tend to rise as U.S. parent firms expand the facility and operation of their foreign subsidiaries; growth in inward FDIA is also expected to increase OPS exports, since U.S. affiliates of foreign companies may tend to export cutting-edge technology and services know-how to their companies. 19 By the same token, OPS imports are also expected to be a positive function of both outward and inward FDIA. 20 Consequently, we run four regressions for both OPS exports and imports (Tables 7a and 7b ). Each regression contains ~he same set of dummy variables, but a different set of other independent variables. On the export side, regression 1 includes only the relative export price and foreign domestic demand as explanatory variables. Regression 2 has the same specification as regression 1 but uses the relative CPI rather than the relative export price as the real exchange rate measure. Regression 3 includes outward FDIA and inward FDIA, in 19 As discussed in Section 11.B, exports to affiliated foreigners is the sum of(!) U.S. parents' exports to foreign affiliates, and (2) U.S. affiliates' exports to their foreign parents. 20 As discussed in section 11.C, imports from affiliated foreigners is the sum of (1) U.S. parents' imports from their foreign affiliates, and (2) U.S. affiliates' imports from their foreign parents. 14 addition to the relative export price and foreign dome stic demand. Regression 4 drops foreign domestic demand but keeps outward and inwa rd FDIA and the relative export price. The regression results of real OPS exports are repor ted in Table 7a. None of the four regressions appear to be cointegrated, even at a 20 perce nt significance level. These poor cointegration results suggest that the relationships being analyzed have not been sufficiently stable. Of course, the relatively short sample period may have contributed to the finding of a lack of cointegrated equation for OPS exports. In any case, the high adjusted-R2 in all four regressions suggest that the four included variables -- foreign domestic demand, the real exchange rate, outward FDIA, and inward FDIA -are pretty much the main variables driving the movements in real OPS exports, once data impr ovements are taken into account. Regressions I and 2 show that different measures of the real exchange rate make little difference on the estimation results. Both long-run regressions are not cointegrated, and have an Adjusted-R2 = 0.98, A I percent increase in forei gn domestic demand raises OPS exports by 1.57 percent in regression I, and by 1.62 percent in regression 2. A I percent increase in the relative export price lowers OPS exports by abou t 0.23 percent, while a I percent decrease in the relative CPI (or real dollar appreciatio n) lowers OPS exports by about 0.22 percent, in the long run. Regression 3 shows that, when inward and outward FDIA are included as regressors along with the relative export price and foreign dome stic demand, foreign domestic demand is estimated to have a wrong sign: A I percent increase in foreign domestic demand decreases 15 OPS exports by 1.11 percent. 21 The coefficient on the relative expo rt price is estim ated to be some what great er (=0.31) than in the case of regre ssions I and 2. The coefficient estim ate on outward FDIA is estimated to be 0.61, slightly highe r than the coefficient estim ate on inwa rd FDIA (=0.56). Regression 4 drops foreign domestic demand from the list of regressors included in regression 3. The coefficient estimates on outw ard FDIA and the relative expo rt price in regression 4 do not differ much from that in regre ssion 3. However, the coeff icien t estimate on inward FDIA in regression 4 (=0.25) is less than that in regression 3 (=0.56). To comp are the forecasting performances of these four regressions, we estim ate an ECM for each long-run exports equation. We then estimate RMS E and Theil's U for each model--the combination of the long-run equation and ECM. Both in terms of RMS E and Theil's U, model 2 appears to outperform the other three models. The in-sample and out-ofsample forecasts of model 2 are plotted in the uppe r panel of Chart 4. On the import side, we also run four regressions that parallel those on the expo rt side. The regression results of real OPS imports are repor ted in Table 7b. Regressions I and 2 show that different measures of the real exch ange rate do make a noticeable difference on the estimation results. Regr ession I is not cointegrated at a 15 percent significant level, while regression 2 is coint egrated at a 10 percent significant level. A I percent increase in U.S. domestic demand raise s OPS imports by 2.47 percent in Such a finding may be caused by the high correlation s between foreign domestic . dema nd and inward FDIA. In a regression of inwa rd FDIA on a constant term and foreign domestic dema nd, foreign domestic demand is found to be positively correlated with inward FDIA (coefficient estim ate= 3.7L I-sta tistic = 79.68 ). · 21 16 regression 1, and by 2.16 percent in regression 2. The coefficient estimate is larger on the relative import price (=0.78) than on the relative CPI (=0.43), but both are estimat ed to have a wrong sign: A real dollar depreciation is estimated to increase, not decrease, OPS imports. Regression 3 shows that, when inward and outward FDIA are included as regress ors along with the relative import price and U.S. domestic demand, the relative import price becomes insignificant. As a result, the coefficient estimate on U.S. domestic demand becomes much smaller. (=0.59) than in regression I. The coefficient estimate on outward FDIA (=0.87) is estimated to be much higher than on inward FDIA (=0.21). Regression 4 drops U.S. domestic demand as a regressor, but keeps all the other regressors included in regression 3. As in regression 3, both inward and outwar d FDIA are found to have a positive impact on OPS imports; the coefficient estimate on outwar d FDIA is noticeably greater in regression 4 (=1.14), while the coefficient estimates on inward FDIA are nearly the same as in regression 3. Two results of regressions 3 and 4 are worth noting: (1) both inward and outwar d FDIA have a positive impact on OPS imports, and (2) the coefficient on the real exchange rate has a right sign when inward and outward FDIA are included. These results help explain the finding that the real exchange rate has a wrong sign in regressions I and 2. A dollar depreciation may have three effects on OPS imports. The first is the direct and negative (price) effect: A dollar depreciation will raise the import price and thus lower U.S. demand for OPS imports. The second is the indirect and positive effect: A dollar deprec iation may cause inward FDIA to rise, thereby increasing OPS imports. The third is the indirect and negative effect: A dollar depreciation may cause outward FDIA to fall, thereby lowering OPS 17 imports. The finding that a real dollar depreciation has a positive impact on OPS imports suggests that the net indirect effect was positive and outweighed the negative direct effect over the sample period. 22 To compare forecasting performances of these four regressions, we estimate an ECM for each Jong-run imports equation. We then estimate the out-of-sample RMSE and Theil' s U for each model over the 1991 Q4-93Q4 period. The results show that model 2 appears to outperform the other three models, both in terms of RMSE and Theil's U. The in-sample and out-of-sample forecasts of model 2 are plotted in the lower panel of Chart 4. We estimate the following two typical exchange-rate -pass-through equations to find out why the two measures of the real exchange rate make a greater difference on the import regressions. The specifications of both equations are the same as in tourism, but the effective nominal exchange rate and foreign GDP deflator are constructed based on OPS trade weights. (3) The OPS export price equation: ln(P' S) = 0 015 (0.16) + 0.98 ln(S) + 1.17 ln(P) -0.12 ln(P' ) (65.94) (16.97) (2.39) Adjusted-R 2 = 0.999; Phillips-Perron (Z,) = -3.53, ADF = -3.14. In a regression of inward FDIA on a constant term and the real exchange rate, a 1 percent real dollar depreciation is estimated to be posit ively correlated with inward FDIA (coefficient estim ate= 2.69; I-statistic = 12.82). In a regression of outward FDIA on a constant term and the real exchange rate, a I percent real dollar depreciation is also estimated to be positively correlated with outward FDIA (coef ficient estimate = 0.85; I-statistic = 9.67). Inward FDIA grew 118 percent, while outward FDIA grew 51 percent over the 1982-93 period. 22 18 (4) The OPS import price equation: ln(Pm) = 1.79 - 0.51 ln(S) (16.38) (27.17) + 1.00 ln(P) (20.09) + 0.15 ln(P') (4.85) Adjusted-R2 = 0.997; Phillips-Perron (2i) = -6.44, ADP = -6.32. Where variables are as defined for equations (I) and (2) except: S = the effective foreign currency/dollar exchange rate based on OPS export weights; P' = OPS-export-weighted foreign GDP deflator. Equations (3) and (4) show that the elasticities of OPS export and import prices with respect to exchange rate changes basically do not differ from those for tourism exports and imports prices. This finding helps explain why the two measures of the real exchange rate make little difference in both tourism and OPS exports, but result in noticeable difference in both tourism and OPS imports. Several features of the OPS trade regressions are worth discussing. First, both import and export price elasticities are low--below 0.5 (in absolute terms), which is not only lower than the price elasticities for merchandise imports and exports but also lower than those for tourism exports and imports. Second, a I percent increase in outward FDIA is estimated to cause U.S. OPS imports to grow faster than exports. This unfavorable asymmetry, of course, may be a result of the fact that U.S. exports have been larger than imports. Third, the coefficient on inward FDIA in the imports equation is about the same size as that in the exports equation. This finding suggests that a I percent increase in inward FDIA will cause U.S. OPS imports to grow at about the same rate as exports. Given that U.S. OPS 19 exports were larger than imports in the early 1980s, this symmetry sugges ts that the dramatic growth in inward FDIA since the mid- I 980s may be partly responsible for the recent surge in the services surplus. III.C. Identifying the forces behind the service sumlus surge This subsection identifies the factors driving the services surplus rise by netting out each individual factor's direct contribution to the rise. To do so, we use coefficient estimates of regression I for tourism exports and imports (Tables 6a and 6b ),23 and estimates of regression 4 for OPS exports and imports (Tables 7a and 7b). 24 The computation is done in two steps. First, we multiply the coeffic ient estimate of each variable with the actual growth rate of that variable over 1984-9 2 to see what contribution each factor makes to the growth in each dependent variab le -- namely, tourism exports, tourism imports, OPS exports, and OPS imports. Second, based on the share of each component in exports and imports, we net out each factor's contribution to the services balance over the period. Table 8 shows that strong foreign growth was the main driver behind the surge in the services surplus, followed by dollar depreciation. The seven major servic es trading partners grew about 28 percent over 1984-92, contributing 62 percentage points to the 114 percent 23 We choose regression I (which uses the relative export price as the real exchange rate measure), rather than regression 2 (which uses the relative CPI as the real exchange rate measure), to avoid the complication arising from incomplete exchange-rate -pass-through. 24 We choose regression 4 for three reasons: (1) it uses the relative export price as the relative price measure and thus avoids the complication arising from incomplete exchangerate-pass-through; (2) it does not contain an economic variable that is estimated to have a "perverse" effect on demand for OPS: (3) it enables one to estimate the "direct" effect of each independent variable on OPS movements. 20 predicted growth in tourism exports, or 29 percentage points to the 93 percent predicted growth in total (tourism and OPS) exports. If we norm alize the predicted growth in total net exports to be 100 percent over the period, then foreign domestic demand's contribution to net exports amounts to 118 percenta ge points. The contribution of the 34 percent decline in the relati ve export price amounted to about 45 percentage points, while the contribution of the 9 percent increase in the relative import price equals about 26 percentage points. Toge ther, the real exchange rate changes -mainly a result of the dollar depreciation over the perio d -- contribute nearly 71 percentage points to the (normalized) 100 percent rise of the services surplus. Because U.S. OPS exports have been larger than OPS imports over the period, the dramatic growth in inward FDIA (!02 percent) did contribute modestly to the services surplus surge, even though inward FDIA was estimated to have roughly the same percent impact on OPS exports as imports. For the same reason, the unfav orably asymmetric percent impacts of outward FDIA growth on OPS did not result in a majo r drag on the net services exports. The two major drags on net services exports were grow th in U.S. domestic demand and, surprisingly, data improvement. Mainly because data improvement related to a larger extent to imports than exports, it actually had a nega tive net impact on the services surplus. IV. Conclusion This paper estimates a forecastable model of U.S. nonm ilitary and nontransportation services trade. Because the dependent and independe nt variables appear to be nonstationary variables, we use the two-step (cointegration and ECM ) approach suggested by Granger and 21 Engle (1978) to avoid spurious regressions. The mode ls appear to fit the data very well both within and out of the sample. Using the coefficient estimates of the models and the past grow th rates of the main determinants of services trade flows, we find that the surge in the services trade surplus since the mid- l 980s is largely attributable to movements in traditional macroeconomic variables. Robust economic growth abroad and the substantial depre ciation of the dollar in the secon d half of the 1980s are the primary factors driving the rapid rise in the services surplus. Growth in either outward or inward foreign direct inves tment asset has had only a modest net effect on the services balance. The finding that data impro vement has a negative net impa ct on the services surplus suggests that the services surpl us surge may in fact reflect a comparative advantage in favor of the U.S. services indus tries. 22 : Appendix: Transportation and Military Service Trade Both transportation and military services command a relatively small share of total services trade, and have remained relatively stable over time (Chart 2). Together, they run a small deficit. The surge in the services surplus would have been higher were these two accounts not included. Transportation The transportation account includes receipts and payments for services involving the transport of merchandise goods via water, air, rail and pipeli ne. The primary transportation services are (1) freight charges, (2) operating expenses at foreig n ports, and (3) vessel charters and rentals. Freight charges are incurred when the vessel operators and aircra ft carriers of one country carry goods to a foreign country and between foreign ports. Also included are the expenses of rail carriers for transporting goods between Canad a, the United States, and third countries and the costs to pipeline companies for moving gas and oil from the United States to Canada. Port services cover the expenditures of shipping, air, and rail carriers at foreign ports, including fuel, port call and cargo expenses, wages paid to foreign residents, repair and maintenance fees, and terminal services. Charter hire and rental s are the expenses for the charter of vessels and the leasing of aircraft and freight car to foreigners. An important factor in estimating transportation receipts and payments is determining the residency of a vessel operator, since it may differ from the vesse l's country of registry. U.S. companies, for example, commonly operate tankers that are registered in flag-ofconvenience countries (for example, Panama, Liberia, Honduras), either directly or indirectly through foreign subsidiaries. If directly operated, U.S. comp anies are treated as U.S. residents. If indirectly operated, the foreign subsidiaries of U.S. companies are treated as foreign residents. Military The activity recorded in military services is based on who condu cts the transaction, not on what is traded. Commercial transactions between privat e firms and governments involving military type of goods or services are not included, unless a U.S. military agency participates. The transfer of goods and services to foreign governments are recorded as receipts, and direct defense expenditures abroad are recorded as paym ents. Because military installations abroad are considered part of the U.S. economy, the accounts include the receipts and payments of U.S. military installations abroad. Receipts are mostly transfers under foreign military sales programs. Payments cover a broad spectr um of activity: (1) expenditures by U.S. personnel abroad, (2) wages paid to foreig n residents, (3) construction expenses, (4) foreign contractual services, (5) foreign goods and services purchased for military assistance programs, (6) NATO support project paym ents, and (7) foreign goods and services purchased by the U.S. Coast Guard. 23 Data Appendix Tourism U.S. real tourism export is nominal tourism exports divided by the service export deflator (1985=100). Nominal tourism exports and the service export deflator are obtained from the U.S. Department of Commerce (Survey of Current Business, various issues). U.S. real tourism import is nominal tourism imports divided by the service import deflator (1985=100). Nominal tourism imports and the service import deflator are obtained from the U.S. Department of Commerce (Survey of Current Business, various issues). Foreign Domestic Demand is a weighted index of the real domestic demand of the seven major U.S. trading partners, based on share of tourism exports. Real domestic demand for six trading partners is obtained from the Bank of International Settlements. Mexico's real domestic demand is obtained from the Banco de Mexico. (Country shares of tourism exports are shown in Table Al below.) U.S. Domestic Demand is obtained from the U.S. Department of Commerce, Bureau of Economic Analysis. The relative export price is the U.S. services export deflator (in foreign currency terms) divided by the foreign GDP deflator. The U.S. export price deflator in foreign currency terms is the product of the U.S. export price deflator and the effective nominal exchange rate (foreign currency/dollar). The effective nominal exchange rate is a weighted index of the bilateral exchange rates between the US and each of its seven trading partners, based on share of tourism exports. Foreign GDP dejlator used in the relative price term is a weighted index of the GDP deflators of the seven major trading partners. Foreign GDP deflator and bilateral nominal exchange rate for six trading partners are obtained from the Bank of International Settlements. Mexican data are obtained from the Banco the Mexico and the International Monetary Fund. The relative import price is the U.S. service import deflator divided by the U.S. GDP deflator. U.S. GDP dejlator is obtained from the U.S. Department of Commerce. Other Private Services and Royalties & License Fees (OPS&RLF) U.S. real ops&rlf export is nominal ops&rlf exports divided by the service export deflator ( 1985=100). Nominal ops&rlf exports are obtained from the U.S. Department of Commerce (Survey of Current Business, various issues). 24 US real ops&r lf import is nominal ops&rlf imports divided by the service import deflator (1985=100). Nominal ops&rlf imports are obtained from the U.S. Department of Commerce (Survey of Current Business, various issues). Outward FDIA is the total real U.S. foreign direct investment assets abroad, obtained by cumulating real U.S. FDI outflows. Real U.S. FDI outflows are obtained by deflating nominal U.S. direct investment abroad by the weighted foreign producer price index based on the share of U.S. FDIA (1985=1). Nominal U.S. direct investment abroad is obtained from the U.S. Department of Commerce (Survey of Current Business, various issues) . Inward FDIA is the total real foreign direct investment assets in the United States, obtained by cumulating real U.S. FDI inflows. Real U.S. FDI inflows are obtained by deflating nominal foreign direct investment in the U.S. by the U.S. producer price index (1985=1, U.S. Department of Labor). Nominal foreign direct investment in the U.S. is obtaine d from the U.S. Department of Commerce (Survey of Current Business, various issues) The relative export price is the U.S. services export deflator (in foreign currenc y terms) divided by the foreign GDP deflator. The U.S. export price deflator in foreign currency terms is the product of the U.S. export price deflator and the effective nominal exchan ge rate (foreign currency/dollar). The effective nominal exchange rate is a weighted index of the bilateral exchange rates between the United States and each of its seven trading partners, based on share of ops&rlf exports. Foreign GDP deflator used in the relative price term is a weighted index of the GDP deflators of the seven major trading partners. Foreign GDP deflator and bilateral nominal exchange rate for six trading partners are obtaine d from the Bank of International Settlements. Mexican data are obtained from the Banco the Mexico and the International Monetary Fund. (Country shares of ops&rlf exports are shown in Table Al below.) The relative import price is the U.S. service import deflator divided by the U.S. GDP deflator. US GDP dejlator is obtained from the U.S. Department of Commerce. Table A I. Share of US services exports by country US Major Trading Partners Tourism OPS&RLF Canada France Germany Italy Japan Mexico United Kingdom 0.22 0.06 0.08 0.03 0.32 0.12 0.16 0.23 0.10 0.12 0.05 0.23 0.05 0.22 25 References Campbell, J. and P. Perron, "What Macroeconomists Should Know About Unit Roots," NBER Macroeconomics Annual, forthcoming, 1991. Clarida, R., "The Real Exchange Rate and U.S. Manufacturing Profits: A Theore tical Framework with Some Empirical Support," FRBNY Research Paper no 9214, 1992. Dickey, D., and W. Fuller, "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, (49), 1981. Engle, R., and C. Granger, "Co-integration and Error Correction," Econom etrica, (55) 1987. Engle, R., and B.S. Yoo, "Forecasting and Testing in Co~integrated System s," Journal of Econometrics, (35), 1987. Goldstein, M. and Mohsin S. Khan, "Income and Price Effects in Foreign Trade," in Ronald W. Jones and Peter Kenen, eds., Handbook of International Economics. New York: North Holland, 1985. Helkie, W., and L. Stekler, "Modeling Investment Income and Other Service s in the U.S. International Transactions Accounts," International Finance Discussion Papers , the Board of Governors. No. 319., 1987. Kravis, Irving B. Services in the Domestic Economy and in World Transa ctions, NBER Working Paper No. 1124. Cambridge MA:NBER, May 1983. Helkie, W., and L. Stekler, "Modeling Services in the U.S. International Transa ctions," Manuscript, International Finance Division, the Board of Governors, I 992. 26 TAB LE 1. THE U.S. SER VICE S ACC OUN T BY COM PON ENT (Per cent Share) Exports !mR.Qrt~ (Billions of $) N~t 198§ 11!!!~ 1!!e§ 199~ 1!!e§ 1!!93 85.5 184.0 78.2 125.6 7.4 58.4 30.4 40.3 41.5 41.4 -6.4 22.2 10.0 6.2 17.6 9.7 -5.2 -0.8 Transportation 18.4 12.6 21.4 19.5 -0.9 -1.4 Othe r Private Services 31.9 29.8 17.8 25.6 13.4 22.8 9.3 11.1 1.8 3.9 6.5 15.6 Total Services (billions of$) Tour ism Milit ary Roya lties & License Fees Memorandum: (billions of $) Merc hand ise Trad e ~~R.Qr!~ 1!!e§ H1!!~ 1986 lm1>1:>!1~ 1!3!3~ 1!3136 19!:13 223. 3 456. 9 368.4 589.4 -145.1 -132.6 -151.2 -103.9 Net Curr ent Account TABLE 2 U.S. TOURISM TRANSACTIONS, BY REGION (billions of dollars, balance of payments basis, annualized rates) Tourism Exports Western Europe of which, U.K. of which, Germany Canada Japan Latin America, and Other Western Hemisphere of which, Mexico Other Tourism Imports Western Europe of which, U.K. of which, Germany Canada Japan Latin America, and Other Western Hemisphere of which, Mexico Other 1986 198.9 1992 1993 26.0 46.9 71.3 74.2 7.6 n.a. n.a. 14.7 4.8 2.4 24.0 7.6 4.9 24.6 8.2 5.3 3.3 6.2 9.3 8.6 4.3 9.6 13.8 14.4 6.9 2.2 10.0 4.3 15.0 6.2 16.3 5.7 3.9 6.0 8.8 9.7 32.4 41.7 49.6 52.0 12.1 n.a. n.a. 15.9 4.5 3.2 18.2 4.8 3.0 19.6 6.0 3.3 3.3 3.6 3.8 4.0 1.8 2.4 3.0 3.4 8.2 2.9 11.2 4.8 13.5 5.8 14.2 5.8 7.1 8.4 10.3 10.4 TABL E 3 OTHE R PRIVATE U.S. SERVICES TRANSACT IONS (billions of dollars, seasonally adjusted) EXPO RTS (RECEIPTS) Total other private services exports (Imports) Ue ltro..ml .11.!!ili§l!!!l1Qr!l!!lf!8~ IMPORTS (PAYMENTS) 1IDle 1989 1992 ~ 1W 1009 1992 :Im 27.3 36.5 51.0 54.9 13.9 19.9 26.6 32.1 (!~ 1?~ . 16,1 Hl.0 3.9 7.9 1().0 US paren ts' exports to (imports from) their foreig n affiliates 10.!, 5.4 9.1 10.2 10.5 2.4 4.8 5.3 5.6 US affiliates' exports to (imports from) their foreig n paren ts 2.8 3.2 5.9 5.5 1.5 3.1 4.6 5.0 11!,1 .. g4,g .. 34,9 38.9 10.0 1;!.0 111-?' gq; 3.5 4.6 6.2 6.8 0.4 0.6 0.7 0.8 3.3 5.0 5.5 6.5 1.8 2.1 3.5 5.6 2.0 0.5 1.2 1.5 2.2 0.8 1.3 2.9 1.8 2.5 3.0 3.2 3.3 5.2 6.1 6.5 4.4 0.1 1.0 0.1 0.3 0.3 0.1 0.8 0.1 1.0 0.5 0.2 6.2 0.1 1.0 0.2 0.4 0.3 0.4 0.9 0.2 1.7 0.6 0.3 12.1 0.3 1.8 0.6 0.7 0.7 1.4 1.9 0.2 2.8 0.7 0.9 13.3 0.3 2.1 0.7 0.6 0.8 1.5 2.3 0.2 3.1 0.7 0.9 1.3 0.1 2.0 0.2 0.0 0.0 0.1 0.1 0.1 0.4 0.1 0.7 3.4 0.5 0.1 0.1 0.3 0.2 0.3 0.3 0.1 0.7 3.9 0.6 0.3 0.1 0.3 0.3 0.3 0.3 0.1 0.8 n.a. n.a. n.a. n.a. n.a. n.a. n.a. 4.1 5.4 6.9 7.5 1.1 1.4 1.6 1.8 n.a. 2.3 2.5 n.a. n.a. 1.8 •: Exports include mainly expenditures of foreig n governments and international organizations in the US. Imports include mainly wages of foreign reside nts temporaily employed in the US, and of Canad ian and Mexican comm uters in the US border area. 0.1 n.a. bil' '·\ P.:·!llfr.QmlJ~!llll li!I~.!190.~ . f§ . ,. Financial Services Insurance Telecommunicalions Business, Professional, Technical services Advertising Comp uter & data processing services Data base and other information services Research, devel opme nt and testing services Management, consuHing, and public relations servic es Legal servic es Construction,engineering, architectural & mining Industrial engineering Installation, maintenance, and repair of equipment Medic al servic es Other Adden dum: Film and tape rentals ~\... ., - ,,..1,_,_;,,,.:...,1,_..;._,...~ -----~~- ··---J, .. ;_..._, .. ;:. Education Other ' o.o o.o 0.1 0.1 0.0 0.3 0.1 0.5 n.a. TABLE 4 U.S. ROYALTIES AND LICENSE FEES (billions of dollars) Exports (Receipts) .T..2.~ffili~te9.fi21!!i9D~f§.,_ . . -~ ···- - -~····-----·· U.S. parents' exports to foreign~----affiliates U.S. affiliates' exports to their foreign parents :Jg_Un~fmi~tE1.!!FQrE1,lgnE1,~ Industrial processes Books, records, and tapes Broadcasting and recording of live events Franchise fees Othe r Imports (Payments) IEr2m:A.ffmatedifloreignt1rfilc.c --~-- c.~-~ ··-~ -·U.S. parents' imports from their foreign affili ates U.S. affiliates' imports from their foreign pare nts IErP11LlJn.mtms~Eflr~l9n§fll Industrial processes Books, records, and tapes Broadcasting and recording of live events Franchise fees Other 1fil36 1fillli 1992 ~ 7.9 13.8 19.9 20.4 . ,Q,Q . 5.8 0.2 . 11.9 10.6 0.3 1q.~ 15.2 0.7 1f?.O 15.2 0.8 n.a. n.a. n.a. n.a. n.a. 1-~ 2.9 2.1 0.1 0.1 0.2 0.4 4.0 2.5 0.2 0.1 0.3 0.8 4.4 2.8 0.2 0.2 0.4 0.8 1.4 2.5 5.0 4.8 Q,~ 1.7 0.1 1.6 ?,? 0.2 3.1 3.5 0.2 3.2 0.8 0.6 0.1 0.1 0.0 0.1 1.7 0.8 0.1 0.6 0.0 0.2 1.4 1.0 0.1 0.0 0.0 0.2 0.1 0.8 O.q n.a. n.a. n.a. n.a. n.a. Ta ble 5. Te sts of Ord er of Int egr ati on (Sa mp le Per iod : yar iab 1a 197 4:Q l to 199 3:Q 4) APl fk•J. 1 taa t sta tis tic US dom est ic dem and 4US dom est ic dem and 0.5 2 4.9 7 for eig n dom est ic dem and 4fo rei gn dom est ic dem and 1.3 0 3.5 7 rel ati ve imp ort pri ce 4re lat ive imp ort pri ce 1.7 4 4.4 9 rel ati ve exp ort pri ce 4re lat ive exp ort pri ce 1.0 4 6.0 6 out wa rd FDI A 4ou twa rd FDI A 2.5 7 7.1 3 inw ard FDI A 4in wa rd FDI A (k= 0) (k= 0) 0.8 8 3.6 7 No tes : 1. var iab les are in log ter ms . I' 3. is the num ber of lag s in the ADF reg res sio n of var iab le X: Re lat ive imp ort pri ce = us ser vic e import de fla tor US GDP de fla ter 4. Re lat ive exp ort pri ce = us ser vic e exp ort de fla tor for eig n GDP de fla ter Table 6a. Real U.S. Tour ism Es:po rts (t•stati stics in parent hesis, Long -Run Equa tion ■ample (1) period : 1973Q4 - 1993Q4 ) (2) Regres sor Coeffi cients Coeffi cients Consta nt -3.59 (-6.87) -4.32 (-8.81) Foreig n domes tic deman d 2.19 (24.01) 2.28 (24.25) Relativ e export price -0.42 (6.06) Relativ e CPI 0.36 (4.113) D84 D90 0.20 (7.84) 0.18 (7.44) 0.18 (6.69) 0-19 (7.59) Adjust ed-R2 o.99 4.92 5.16 0.99 4.67 4.89 ADF Phillip s-Perro n(Zt) Error Corre ction Mech anism Regres sor Coeffi cients Coeffi cients Residu altt-1 l -0.51 (-4.56) -0.46(-4.42) ..lForei gn domes tic deman d(t-1) 2.45 (3.63) 2.57 (3.81) Adjust ed-R2 DW 0.28 2.10 0.27 2.15 RMSE Theil U 1.07 0.019 1.03 0.019 Notes: J. DS4 = 2, 3. 4, 5. 6. (all the variab les are in Jog terms, except the dumm y variab les) a consta nt dumm y for 1984:1-1993:4. D90 = a consta nt dumm y for 1990:1- 1993:4. Relativ e export price= USd service export deOato r in foreign curren cy terms.l foreign GDP deflato r. Real CPI = foreign CPVUS CPI in foreign curren cy terms. RMSE & Theil U measu re out-of- sample foreca st based on regres sion using 1973Q- 91Q4 sample period . <>I(t ► = x(t)-x(t -1). Table 6b. Real U.S. Touri sm Impor ts (t-statis tics in parenth esis, sample period: 1_973Q4 • 1993Q4 ) Long-Run Equat ion Regres sor (1) (2) Coeffic ients Coeffic ients Consta nt -4.11 (-5. 71) -4.90 (-5.21) US domest ic demand 0.99 (11.18) 0.82 (8.04) Relativ e import price -1.07 (-9.26) Relativ e CPI -0.40 (-6.02) D84 D90 Adjuste d-R2 ADF Phillips -Perron (Zt) 0.36 (12.44) 0.07 (4.40) 0.99 -5.62 -5.91 0.44 (14.66) 0.10 (4.41) 0.98 -5.17 -5.30 Error Corre ction Mecha nism Regres sor Coeffic ients Coeffic ients Residua l(t-1) -0.38 (-2.66) -0.30 (-2.49) LiUS domest ic demand (t-1) 1.11 (2.20) 1.31 (2.55) Adjuste d-R2 DW 0.09 1.92 0.08 2.09 RMSE Theil U 1.50 0.018 1.45 0.017 Notes: (all the variabl es are in log terms, except the dummy variabl es) 1. D84 = a constan t dummy for 1984:1-1993:4. 2. D90 = a constan t dummy for 1990:1-1993:4. 3. Relativ e import price = US service import deflator /US GDP deflato r in foreign currenc y terms. 4. Real CPI = foreign CPI/US CPI in foreign currenc y terms. 5. RMSE & Theil U measur e out-of-s ample forecas t based on regress ion using 1973Q-9 1Q4 sample period. 6. Llx(t) = x(tJ-x(t .l). Tab le 7a. Rea l US Ezp orts of Oth er Priv ate Serv ices (inc ludi ng roya lty (t.aa tiatic a In paren theai a, 8"1Dple perio d: 1982 Ql • 1993 Q4) Lon g-R un Equ atio n Regr essor Cons tant (1) (2) (3) Coef ficie nts Coef ficie nts Coef ficie nts -1.49 (-1.80) -1.74 (-1.92) -4.02 (-2.18) -6.G8 (-3.41) 0.81 (3.32) o.88 (3.G5> 0.G8 (2.82) 0.25 (3.89) 0.Sl (3.77) 0.83 (3.92) Inwa rd FDIA -0.23 (2.40) Rela tive CPI. 0.22 (2.17) Fore ign dome stic dema nd 1.G7 (11.21) 1.62 (12.00) D86 D91 0.11 (3.84) 0.15 (8.55) 0.10 (3.33) 0.14 (7.85) Adju sted- R2 ADF Phill ips-P erron (Zt) (4) Coef ficie nts Outw ard FDIA Rela tive expo rt price & lice nse fees ) . -1.11 (-1.88) 0.11 (4.112) 0.05 (2.27) 0.10 (4.35) 0.07 (3.04) 0.98 -3.12 -3.24 0.98 -3.10 -3.22 Coef ficie nts Coef ficie nts Coef ficie nts Coef ficie nts -0.36 (-2.80) -0.38 (-2.97) -0.42 (-2.24) -0.48 (-2.81) .1.Ou twurd FDIA ft-1) 0.87 (2.11) 0.87 (2.14) 0.78 (1.83) 0.80 (1.95) .lOPS expo rts(t- 1 J 0.14 (1.22) 0.14 (1.27) 0.20 (1.62) 0.19 (1.83) 0.02 1.80 0.04 1.81 -0.03 1.83 0.02 1.82 1.79 0.014 1.76 0.013 1.96 0.015 1.89 0.014 0.99 -3.80 -3.83 0.99 -3.42 -3.G2 Erro r Cor rect ion Mec hani sm Regr essor Resid uallt- 1) Adju sted- R2 DW RMS E Thei l U Note s: (all the varia bles are in log term s, exce pt the dumm y varia bles) a cons tant dum my for 1986: 1-199 3:4, a cons tant dum my for 1991: 1-199 3:4. Rela tive expo rt price ., US servi ce impo rt defta tor in forei gn curre ncy term s/for eign GDP deOa tor. Real CPI = forei gn CPI/U S CPI in forei gn curre ncy term s. RMS E & Thei l U meas ure out-o f-sam ple forec ast based on regre ssion using 1973 Q-91Q4 samp le perio d. <l.x(t) = x(t)-x (t-1). 1. D86 = 2. D91 c 3. 4. 5. 6. Tabl e 7b. Rea l US Expo rts of Othe r Priv ate Serv ices (incl udin g roya lty & licen se fees) (t-ata tiatico ill paren theaio , samp le period : 1982Q l - 1993Q 4) Long -Run Equ ation Regre ssor Cons tant (1) (2) (4) Coeff icient s Coeff icient s Coeff icient s Coeff icient s -17.24 (9.87) -12.37 (-8.88) -15.29 (-6.40 ) -14.33 (-6.08) 0.87 (2.88) 1.14 (4.81) 0.21 (2.89) 0.25 (3.67) -0.14 (-0.64) -0.44 (2.62) Outw ard FDIA Inwa rd FDIA Relat ive impo rt price (3) 0.78 (3.09) Relat ive CPI 0.43 (3.74) US dome stic dema nd 2.47 (11.84 ) 2.16 (13.42 ) 0.69 (1.68) ) DSG D91 0.11 (2.52) 0.14 (5.49) o.u (2.69) 0.14 (6.25) D.18 (4.90) 0.02 (0.63) 0.22 (7.88) o.oo (-0.13) 0.98 3.45 3.69 0.98 4.77 3.45 0.99 3.89 3.83 0.99 3.76 3.89 Adjus ted R2 0 ADF Philli ps-Pe rroo(Z t) Erro r Corr ectio n Mec hani sm Regre :ssor Resid uaHt• l) ~Inw ard FDIA( t-1 J Coeff icient s Coeff icient s Coeff icient s Coeff icient s -0.29 (-2.83) -0.28 (-2.67) -0.43 (-3.31) -0.39 (-2.95) 0.60 (3.59) 0.35 (1.60) 0.64 (3.90) o.64 (3.64) _\Out ward FDIA (t-1, t-2) 1.01 (!.65) ~OPS impor ts(t-1 ) 0.07 (1.53) 0.07 (1.38) 0.08 (1.92) 0.09 (1.95) Adjus ted-R 2 DW 0.03 1.87 0.06 1.93 o.os 1.85 0.04 1.86 RMSE Theil U 0.81 0.016 0.70 0.014 0.85 0.017 0.89 0.017 ~ (all the varia bles are in log terms , excep t the dumm y variab les) a const ant dumm y for 1986:1 -1993: 4. a const ant dumm y for 1991:1 -1993: 4. Relat ive impo rt price = US servic e impo rt deflat or/US GDP deflat or. Relat ive CPI = foreig n CPVU S CPI in foreig n curre ncy terms . RMSE & Theil U meas ure out-o f•sam ple forec ast based on regre ssion using 1973Q~91Q4 samp le perio d. iix(t) = z(t)-s( t-1 ). 1. D86 "" 2. D91 = 3. 4, 5, 6. Table 8. Explaining the Sur ge in Rea l U.S. Services Surplus, 1984-92 (nonannualized, percent) Actual growth I I I i>redicted Gro wth Other Private Services & ALF Exports Imports 73 85 75 85 foreign dom esti c demand (28) I Tou rism Exports Imports Total Tourism OPS & ALF Exports Imports 128 55 99 66 33 114 60: 93 68 25 100 29 31 I 62 I U.S. dome~tic demand (22) 29 26:' 17 ' relative export price (-34) 9 relative imp ort price (9) Balance Percentage of Predicted Total Ser vice Growth Exporie Imports 14 -4 11 -8 -17 11 -7 7 27 35 -8 13 14 100 Balance 100 118 25 12 -68 45 -10 26 29 51 -33 -2 14 21 -6 13 9 4 >tes: Growth rates of explanatory varibles ove r 1984-92 are shown in parenthesis. relative export price = export price defl ator x exchange rate/foreign GD P defl ator. relative imp ort pric e= import price defl ator/U.S. GD P dellator. Average sha re of tourism exports in tota l (tourism, OPS & ALF) services exports is 47% over 1984-92, Average share of tourism imports in tota l (tourism, OPS & ALF) services imports is 66% over 1984-92. A 1 percent doll ar appreciation is esti mated to increase relative export pric e by about 1 percent, and decrease relative import price by 0.5 percent ove r time, holding US and foreign prices unchanged. 14 13 18 data imp rove men t outward FDIA (37) inward FDIA (102) _ 17 I I 24 25 21 421 261 38 I 42'I ' CH AR T 1: U.S. GOODS AN D SERVICES TR AD E BA LA NC E billions of$, BOP basis, saar 100 , - - - - - - - - - - - - - - - , A. NOMINAL billions of 1987$, BOP basis, saar 100 8. REAL Services Trade 50 0 :,, ' I I ' 0 I \ \ I -50 - " I r I I I .., II II I I 11 I I f 1,1 •••••• •••••• ••• •••••• •••••• • . L • ••••• •••.•• ••••• .••••• ••.••. ••. ~ I I I -50 I I ' ,. I ,,, I Merchandise Trade ' ' / I I ',, ...... ...... . - ...... ... - ...... . - ...... . ·'·,. -:\ , ',, ,/ I I ...... ... I I. ,, I\ ' .I . I II I I I -100 11 ', .. .,. ~. ~ I Merchandise Trade • I -' ,, I I ' -150 II I -'". I I I I ,11 I• ' I I I I I • ·•- •- - • -•- .• fl I "'' I I ., I I L I , ' I I I I I I \ ••••• •.•••• ••••• ••.••• ••••• ••••• I •••••• •••••• ••••• \ \ j \ i -150 I ' ,, ' ' ,, ' f I I -10 0 Services Trade 50 ,-... ..... ..... ..... ..... ... . 1' I ,; \ I . \. . J"" \ \ I I \ I I I I I I ~ \ I ,·11h» ~~1.,, 1,.,1, -200 I '"""'1'~~r,lw/9';~"" .. ( "19s(""~~ ... "l'9~ I 6 199.1 -200 , 1""', jlj~;" ,"'1tj7~ , '""j9 , , /\i" , ,'"1tjg~ '"" , l~s~"\...'I1>'\\II"'"199.1 ' '" , Chart 2: U.S. SERVICE ACCOUNT BY COMPO NENT billions of$ , BOP basis, saar 50 40 ........ - ................ ........ ......................... ......................... . - ....................... ... ...... ..... ..... ..... ..... ..... ..... ... . . . . . . . . .. . .. ..... ..... ' I . ..... ..... . .. .,,. --- -------------' Net Tou rism ' , . .. ·;- "~- ..... ... . - ... ,_ ... - _. - ........ ·--·-··-"· . ,, .. -,..---JI'•'-.;, .. .;.-... -~."": .. ....-··-··--. _ ,' ,-.----------,_._,' ..... ..... ..... ..... .... . . . . . .. . . . •• I ........... I 10 , ' ' -···· ····· ····· ;··~ ~-- .-......... ,• 0 ,,, .\ . , Net Oth er Private Services & Royalty & License Fees 30 20 • . . . . . . . - . . . . . . . . . 1·\. , . . . .... . - ..., --/-··''-./,_,,,. , ..._ ....... ..._ ·/v \/·· ·. ' ,,,, ·.~r-·· V -10 1.. \· ·. r·/\·.J.·~. . / . \ : I / =-v: Net Military -20 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 .. .._, ~ . Chart 3: Actual and Fitted Tourism Exports and Imports billions of US$ 160 r--------------------------,------,----, A. EXPORTS ,- 140 r--·········· ............. ............. ·············· ·············· ····· .. 120 1- ........................................................................................................actual .. 100 r-- · · .. · · .. · · · · · .. · .. · · · · · · · · · · .. · · · · · · · · · · · · · · · · · · .. · · · · · · · .. · · · · · · · · · · · fitted .. ·~· · 80 r--············ ·············· ··········· ·············· •············ ···· 60r--····· ············ ············ ············ ············ ············ ············ ~ 40 r········ 20 120 1973 out of sample . . . . . • • . . . . 1975 .., . • . . . . • . . . . ! ""'!, 1977 1979 1981 1983. 1985 1987 1989 1993 1991 .-----------'-----------------~-7 B. IMPORTS ., 100 r············ ············· ············· ············· ··········· ~-:-,.. 80 r············ ············· ············· ···· ·············· ·· ·.· actual 60 r············ ···· ·············· .. ... ········· ... ... 1979 1981 ~~ 40 I-········=- ~"'"········ ············· ····· .. ~ 20 1973 1975 • 1977 out of sample fitted 1983 1985 1987 1989 1991 .., 1993 • Chart 4: Actual and Fitted OPS&RLF Exports and Im ports billions of US$ 160.------ A.EXPORTS ------------ ~----, 140 t-···· ······ · ······ ······ ······ ······ ······ ······ ······ ······ ··· ..... ..... ..... .. . 120 f-··· ······ ······ ······ ······ ······ ······ ······ ,,, r 00 a~al2 . ················ 1- ·· ······ ······ ···· .... .. ...... .... -- > - ---c..._... ..,, __ - - - ······ ······ ······ ······ ······ ······ ··· · · · ····~·"'············ ---- 1985 4.6 . - - - - - - - - - - - 1989 1991 ------------- ~... JM.:PQ~T.S. ............................................... . 4.2 t-···· ······ ······ ······ ······ ····· ····· --- - - ... -- 3.8 ,- · · · · · · · · · · · · · · , 1-··· ······ ·····. ·····actual · · ·/~ ·tt ~d -------- --'-~ ....... ...,'-- :-'-;: -~ I 993 ------, ...... ...... ...... ...... ... . 4 t-···· ······ ····· ······ ······ ······ ·· 3 .6 l··· --'-- ~............~ ~ ~ ~ . . . . . . . . i . . . ~ ~.........~---- 1987 log 4.4 1- .. ..... . ~·· _,' fitted 60 ~-.. __._ _~~ ..... ..._ __._ _.__ ._~ -.._ ._~ I 983 out of sample .. - .. ·...: ·.,;;. ·..,;,_;f.,- ,,, ,. ' out of sample 3.4 I-···· ······ ······ .·· ...... .... ,fr.~.... . 3.2 3 ...._._._..._L-:;1:':::9-;t83::-'-_._._~...._,_-1-=-98;,-..,5,.._.i-~__,__1~9-8_7 ...._.__~~....L-.l-9-89~L........~.......J...-I<-::-c99~J........1.~~.....J....,I"""9~9-:::---'3.