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The · Psychohistorian

Basic international economics

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Today, the government announced trade figures for June. These figures showed a noticeable reduction in the trade deficit.

That shouldn't be surprising. There was a significant collapse in the value of the dollar versus most foreign currencies earlier this year. That contributed to the gasoline price increases that you might remember. However, it also makes American goods, which are priced in dollars, cheaper relative to foreign competitors. The predictable result was that some foreign buyers started switching to American goods, increasing our exports and reducing our trade deficit. It probably also helped preserve a few American jobs and may have contributed to our staying just out of that recession many were expecting.

What was surprising - at least to me - was that, well, Wall Street was surprised. Evidently their prognosticators didn't expect an improvement in the trade picture, even though they knew about the exchange rate changes. Weren't they paying attention in economics class in school?

Now they seem to be drawing a straight trend line and predicting further improvement; one of them has gone so far as to predict "the bottom might fall out of the trade deficit". I'm not sure I'd go that far. The dollar recently recovered some of its losses from earlier in the year; that will help moderate gasoline price increases, but it will probably also moderate the improvements in the trade picture.
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