Transcript International Dimensions of Manufacturing

International Dimensions of Manufacturing
Jeffrey R. Campbell
Federal Reserve Bank of Chicago and NBER
Employment Consequences of an
“Overvalued” Dollar
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American consumers’ substitution towards cheap
imported goods reduces employment in U.S.
manufacturing industries.
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Import assembled cars. (Knetter)
Bring the car here one piece at a time (Pali)
Imported materials become cheaper, increasing
employment in downstream industries.
With PTM, U.S. exporters raise their ¥ prices,
perhaps lower their $ prices, and cut production.
In competitive markets, exporters lower their $
prices and cut production.
World Price, $15
Quantity Supplied, 3
$15
Supply Curve
$10
$5
ANDY
0
CHARLIE
BOB
1
2
Jobs/Airplanes
3
Quantity Supplied, 2
$15
World Price, $10
$10
$5
ANDY
CHARLIE
BOB
(Lost Job)
0
1
2
Jobs/Airplanes
3
Quantity Demanded, 1
World Price, $15
$15
Demand Curve
$10
$5
XENA
YVONNE
ZELDA
(Unemployed)
(Unemployed)
1
2
Flights/Jobs
3
World Price, $10
$15
Quantity Demanded, 2
$10
$5
XENA
YVONNE
ZELDA
(New Job)
(Unemployed)
1
2
Flights/Jobs
3
Summary
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Quantity demanded increases from 1 to 2.
Quantity supplied decreases from 3 to 2.
Net exports fall from 2 to 0.
Andy and Bob (Low cost suppliers) lose. ($10)
Charlie (High cost supplier, Lost job) does not lose.
Xena (High value demander) wins ($5)
Yvonne (New job) does not gain.
Manufacturing loses one job and Services gain
one job.
U.S. cost of the foreign devaluation, $5.
Conclusions
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Bivens’ procedure overstates the trade deficit’s
effects on employment.
Jobs are a poor measure of economic well-being.
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The devaluation costs job losers (Charlie) less than
survivors (Andy, Bob).
The devaluation benefits the newly employed (Yvonne)
less than the previously employed (Xena).
No change in total employment.
Net cost of foreign devaluation, $5.
What is to be done?
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Jawbone the exchange rate up. (Effective only if the
dollar is truly overvalued)
Lower legacy costs. (Ineffective.)
Tax service producers to subsidize exports. (Makes a bad
situation worse)
Take it on the chin and move on.