Ebook Trade Adjustment and the Composition of Trade
A striking feature of U.S. trade is that both imports and exports are heavily concentrated in capital goods and consumer durables, with roughly three-quarters of U.S. non-fuel imports and exports appearing to fall into these categories. This contrasts with the relatively low production share of the capital goods and consumer durables sectors in the U.S. economy of under 20 percent. But despite the marked divergence between the composition of trade flows and the sectoral composition of U.S. production, most open economy models simply posit imports and exports as depending on an aggregate measure of activity such as real GDP or domestic absorption (as well as on relative prices).
In this paper, we show that a modeling framework that takes account of the expenditure composition of U.S. trade in an empirically-realistic way yields implications for the responses of trade to shocks that are markedly different from those of a “standard” framework that abstracts from such compositional differences. Our methodology consists in contrasting the implications of alternative versions of an open economy SDGE model (“SIGMA”) that embed different trade specifications. In the version adopting a commonly-used trade specification, the activity variable driving real imports is simply domestic absorption, while exports depend on foreign absorption. We refer to this version as the absorption-based trade (AT) specification. By contrast, our benchmark version of SIGMA posits separate behavioral equations for trade in nondurable consumer goods and for trade in investment goods, where the latter includes both consumer and producer durables (i.e., capital goods). These behavioral equations are derived from underlying technologies for producing final consumer and investment goods that differ by allowing the production of investment goods to be more import-intensive. We refer to this version as the disaggregated trade (DT) specification.
As a prelude to our model simulations, we compare the ability of the alternative specifications to account for the historical evolution of U.S. imports. Our analysis provides empirical support for our DT specification, which tracks imports remarkably well, including during periods of large cyclical swings in imports. By contrast, while the fitted import series implied by the AT specification also shows strong comovement with the historical series, it is much less volatile. Intuitively, the improved fit of the DT specification reflects that investment receives a much higher weight in determining imports. Overall, our empirical analysis suggests that investment swings might play a considerably more prominent role in determining trade flows than implied by traditional absorption-based (or output-based) trade models.
We then use our SIGMA model to examine its responses to several domestic and foreign shocks under the alternative trade specifications. We show that the differences in implications across the alternative trade specifications are particularly large for shocks which exert disparate effects on consumption and investment spending either at home or abroad. Examples include shocks that affect the rate of return on investment (“investment shocks”), and preference shocks for consumption (“consumption shocks”). From an intuitive perspective, the activity variable driving imports and exports in the disaggregated trade specification weights consumption and investment by their share in trade, rather than by their share in absorption: this implies an effective weight on investment in the import and export demand functions that is several times larger than in the absorption-based trade specification.
A key result derived from our benchmark DT trade specification is that a shock that raises foreign investment by one percentage point of GDP has a much larger effect on the U.S. trade balance than a shock that boosts foreign consumption by one percentage point of GDP. Moreover, the foreign investment shock is associated with a larger export expansion, and much smaller depreciation of the real exchange rate. This contrasts sharply with the implications of the absorption-based trade model, in which the alternative shocks have broadly similar effects on the real exchange rate, the trade balance, and its components.
Download
PDF Ebook Trade Adjustment and the Composition of Trade
Posted in :
