Academic journal article Monthly Labor Review

Rising Export and Import Prices in 1987 Reversed the Trend of Recent Years

Academic journal article Monthly Labor Review

Rising Export and Import Prices in 1987 Reversed the Trend of Recent Years

Article excerpt

Robert Blanchfield and William Marsteller are economists in the Division of International Prices, Bureau of Labor Statistics. Susan Chen, an economist in the same division, prepared the charts.

The falling value of the dollar played a large role in export and import price increases; exports were also affected by rising commodity price and imports, by rising fuel prices

In 1987, both U.S. export and import prices broke the downward trend of recent years. Export prices rose 6.9 percent, the first increase recorded in the all-export price index which was begun in 1983. (See table 1.) Import prices turned sharply upward, rising 14.8 percent after falling every previous year since the all-import index was initiated in 1982. 1(See table 2.)

The rise in export prices reflected the strong upward trend in commodity prices. Food and crude materials prices rose substantially in 1987 compared to previous years. (See chart 1.) For example, exported food prices were up 9 percent last year after falling 13.2 percent in 1986. Similarly, those for crude materials rose 20.7 percent in 1987 following a 2.5-percent increase in 1986. On the other hand, 1987 price increases for manufactured goods were only marginally changed from those posted in 1986. Price changes for intermediate goods were mixed.

Last year's 14.8 -percent increase in the all-import index was a significant upturn from the 8.7-percent drop in 1986; however, when fuels and related products are excluded, the price changes for the last 2 years were very similar, 9.6 and 8.4 percent, respectively. This is indicative of the large influence that fuels exert on the all-import index. Imported fuel prices rose 43.8 percent in 1987 after declining 51.5 percent in 1986.

Falling dollar and the trade balance

The falling value of the dollar continued to play a large role in the upward price movements for both exports and imports. For a better measure of the effect of the dollar's movement on the prices of imports and exports in foreign currency terms, the Bureau of Labor Statistics developed new indexes. They indicate that, while prices of nonfuel imports have risen 22.4 percent in dollar terms, the tradeweighted value of the dollar has fallen 32.8 percent since March 1985. (See chart 2.) Nonfuel import prices in foreign currency terms declined 17.7 percent during the same period. These offsetting price movements suggest that foreign exporters have been willing to absorb a substantial portion of the drop in the trading value of the dollar. In addition, the moderate increase in export dollar prices since the first quarter of 1985 suggests that U.S. exporters are using currency changes to improve their competitive position. As a result of a modest export price increase in dollar terms of 5.4 percent, and a 27.2-percent drop in the dollar's trade-weighted value, foreign currency prices of U.S. exports have fallen 23.2 percent since the first quarter of 1985.

The dollar began its fall in February of 1985. In September of that year, the decline was accelerated when the Group of Five countries-the United States, Japan, West Germany, Great Britain, and France-agreed to intervene in foreign exchange markets to bring the dollar down further. However, by February of 1987, the dollar had fallen 37.2 percent from its peak, 2 leading to a meeting of the Group of Five countries and Canada and a consensus (the Louvre Accord) to stabilize exchange rates at approximately the levels existing at that time. It was further agreed that, in order to alleviate the large trade imbalances, the United States would strive to reduce its budget deficit, and West Germany and Japan would stimulate their economies.

This program of exchange rate stabilizationexperienced initial success, but some economic analysts were concerned that the high interest rates necessary to maintain the value of the dollar would lead to an economic slowdown. …

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