The high income elasticity of demand often estimated for U.S. imports may be a spurious result of omitting new product varieties from the import price indexes. The purpose of this paper is to demonstrate how to incorporate new product varieties into a constant-elasticity-of-substitution aggregate of import prices. This method is applied to U.S. imports of six disaggregate manufactured goods. It is shown that the corrected indexes are able to account for part--but not all--of the high income elasticities. (JEL C43, F14)

New product varieties and the measurement of international prices

The scope for growth of trade in services is vast. Although services currently make up over 60 percent of world production, they account for only about 20 percent of world trade. A primary reason why international trade in services has been limited is that the performance of many services necessitates physical contact between producers and consumers, a condition that renders service provision to distant locations infeasible. New technology, in particular, the Internet, provides a medium of exchange that overcomes such historical trading hurdles for many services, effectively reducing transport costs from infinity to virtually nothing. There is ample anecdotal evidence that the Internet is having just this sort of an effect on services trade. The accounting firm Netlink maintains the books for 6,000 employees in Reyanosa, Mexico, from their offices in Manhattan. Infosys of India provides softwareconsulting services to international clients, including Apple Computers, Lucent Technologies, and Microsoft. A medical-transcription company in South Africa, ITS, receives digital recordings from abroad electronically and returns a transcribed text file the next day. Still, the question remains as to whether electronic sharing of information is an important enough development to alter significantly the geography of service provision. Indeed, many services need to be tailored to the consumer’s needs and monitored for quality, and these are likely to be more effective if the provider is close by and speaks the same language. In addition, in the event of a dispute, resolution will be less complicated if both parties are subject to the same legal system. Finally, there may be security concerns with allowing foreign access to some documents or systems. Thus, for some services, especially those where familiarity, communication, and non-standardization contribute to quality, the Internet would not be expected to have a large impact on international trade. To determine whether the Internet has significantly affected international service provision in practice, we estimate a general model of services trade across countries and examine whether the inclusion of data on Internet penetration, as measured by the number of Internet hosts in a country, is statistically significant. Overall, our results offer evidence that the Internet is related to growth in services trade. After controlling for GDP and exchange-rate movements, we find that a 10-percent increase in Internet penetration in a foreign country is associated with about a 1.7-percentage-point increase in export growth and a 1.1-percentagepoint increase in import growth. The results are robust to a number of alternative specifications.

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The Internet and International Trade in Services

/pdf/illicit-financial-flows-from-developing-countries-2000-2009-11ygbz7kxp.pdf

Illicit Financial Flows from Developing Countries 2000 – 2009

This paper provides an explanation of the simultaneous occurrence in developing countries of a large accumulation of external debt, private capital outflows and relatively low domestic capital formation. We consider a general equilibrium model in which two types of government with conflicting distributional goals randomly alternate in office. Uncertainty over the fiscal policies of future governments generates private capital flight and reduced domestic investment. This political uncertainty also provides the incentives for the current government to over-accumulate external debt. The model also predicts that left-wing governments are more inclined to impose restrictions on capital outflows than right-wing governments. Finally, we examine how political uncertainty affects the risk premium charged by lenders and how debt repudiation may occur after a change of political regime.

External Debt, Capital Flight and Political Risk

This paper reviews empirical methods used to estimate the impact of trade policies under imperfect competition. We decompose the welfare effects of trade policy into four possible channels: (i) a deadweight loss from distorting consumption and production decisions; (ii) a possible gain from improving the terms of trade; (iii) a gain or loss due to changes in the scale of firms; and, (iv) a gain or loss from shifting profits between countries. For each channel, we discuss the appropriate empirical methods to determine the sign or magnitude of the effect, and illustrate the results using recent studies. Two other channels by which trade policy affects social or individual welfare - through changes in wages and changes in product variety - are discussed more briefly. Recent developments in the analysis of trade policies under perfect competition are also reviewed.

https://www.nber.org/system/files/working_papers/w5051/w5051.pdf

Estimating the Effects of Trade Policy

https://www.federalreserve.gov/pubs/ifdp/1983/227/ifdp227.pdf

An analysis of external debt positions of eight developing countries through 1990

This paper presents an empirical analysis of the factors that contributed to the unprecedented widening of the U.S. external deficit between 1980 and 1986. The paper presents an empirical model of the U.S. current account that is used to assess the relative importance of changes in U.S. price competitiveness and changes in U.S. and foreign growth as determinants of the deficit. We find that while both factors were significant, the decline in U.S. competitiveness associated with the appreciation of the dollar was the dominant factor. The analysis is also pursued at a more fundamental level, using the results of various multicountry model simulations. We find that shifts in U.S. and foreign fiscal policy could account for over half of the widening of the deficit, but only part of the rise in the dollar. Given the importance of the dollar's appreciation to the widening of the deficit, we ask, finally, why the deficit (particularly in real terms) has been so slow to respond to the dollar's decline since early 1985. Several possible explanations are considered and we conclude that the delay can be attributed largely to normal lags in the response of trade prices and volumes to exchange rate changes. Moreover, the real net export deficit would have widened substantially further in the absence of the depreciation.

The U.S. external deficit in the 1980s: an empirical analysis

The servicing burden of U.S. International indebtedness: A model simulation analysis

Recent attention has focused on measures of the dollar's effective exchange rate amid disappointment by some observers with the response of the US trade balance to the depreciation of the dollar since February 1985 In particular, these observers suggest that the traditional indexes, which include only currencies of industrial countries, overstate the dollar's decline because it has depreciated much less against the currencies of some key newly industrialized trading partners ; This paper begins with a description of the uses of effective exchange-rate indexes and describes theoretically the choice of an index, which varies with the application Although the inclusion of currencies of developing countries in an index may be useful for analyzing trade developments, it is not appropriate for some other purposes, such as providing information for monetary conditions The latter part of the paper focuses on measures of exchange rates suitable for analyzing trade flows and domestic inflation and compares their performance in the context of the equations used by the Federal Reserve Board staff to forecast trade components and price deflators for exports and imports The results suggest that the addition of the currencies of important developing-country trading partners in an index of exchange rates improves its performance in forecasting export volume and import prices but makes little difference for the forecasts of export prices

A reassessment of measures of the dollar's effective exchange value

This paper presents the services account sector of a model of U.S. international transactions (the USIT model) that is maintained in the Division of International Finance of the Federal Reserve Board. Part I present the models for payments and receipts on direct investment, other investment income, and non-investment services. Part II reports on simulations that indicate the sensitivity of the model's forecast to changes in its predetermined variables such as interest rates and exchange rates. In particular, we explore the implications of large current account deficits and the resulting accumulation of net claims by foreigners on the United States for the services balance.

William L. Helkie

Papers

An analysis of external debt positions of eight developing countries through 1990

The U.S. external deficit in the 1980s: an empirical analysis

The servicing burden of U.S. International indebtedness: A model simulation analysis

A reassessment of measures of the dollar's effective exchange value

Modeling investment income and other services in the U.S. international transactions accounts