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How Y=C+I+G has evolved

70 years of quarterly national account data

FRED now has 70 years of quarterly national accounts data for the United States, which is an opportunity to look back at how the U.S. economy may have changed since 1947. In the graph above, we look at the three main expenditure components of real gross national product: real consumption, real investment, and real government expenses. They’re normalized to 100 for the first quarter of 1947, to make them more comparable.

The first thing to note is that these aggregates are now a multiple of what they were in 1947. Part of the growth comes from population growth and increases in labor force participation of women, but the majority is from productivity increases as a result of technological progress and new management and distribution techniques. Second, investment fluctuates wildly, which is no surprise to anyone who has studied economic fluctuations. Third, investment’s trend is steeper than consumption’s, while government expenses have increased markedly less since the 1990s. (Note: This does not include expenses related to redistribution.)

How this graph was created: Start at the real domestic product release. Check the three series, then click “Add to Graph.” From the “Edit Graph” tab, change units to “Index” with the date set at 1947-01-01, and click “Copy to all.”

Suggested by Christian Zimmermann.

View on FRED, series used in this post: GCEC1, GPDIC1, PCECC96

Dollar strength and the trade balance

Has the exchange rate shifted the U.S. trade balance?

The exchange rate is the price of one country’s currency in terms of another country’s currency. For example, an exchange rate of 100 Japanese yen to the U.S. dollar means that you can exchange a single U.S. dollar for 100 Japanese yen. The exchange rate is important for international trade because changes in exchange rates often alter the prices of imported and exported goods between countries. For example, if the U.S. dollar appreciates with respect to the Japanese yen, Japanese consumers have to give up more Japanese yen to buy the same dollar value of U.S. goods exported to Japan. In other words, appreciation of the dollar implies that U.S. goods become more expensive to foreigners. On the other hand, appreciation of the dollar tends to make goods imported from other countries cheaper for U.S. consumers. Because of these changes in relative prices, appreciation of the dollar tends to increase imports and decrease exports, thereby deteriorating the trade balance. The trade balance is the total value of imported goods minus the total value of exported goods. Depreciation of the dollar has the opposite effect, likely improving the trade balance.

The graph above shows this relationship between the trade balance and the exchange rate. The green line plots the trade-weighted U.S. dollar index, which is “a weighted average of the foreign exchange value of the U.S. dollar against the currencies of a broad group of major U.S. trading partners.” A higher value of the index indicates a stronger dollar. The blue line is the trade balance-to-trade volume ratio. The trade volume is the sum of the total value of imports and exports. We look at the ratio instead of the trade balance directly because globalization has led to higher volumes of international trade over time. The ratio gives the difference between exports and imports as a share of total trade, thereby controlling for higher volumes.

Over the past three decades, the trade-weighted dollar index has varied significantly. For example, from the second quarter of 1995 to the first quarter of 2002, the index increased from 90 to 127, an appreciation of the dollar of over 40 percent. The corresponding trade balance-to-trade ratio drops from around –6 percent to –16 percent. In general, we see a negative relationship between the exchange rate and the trade balance.

However, the influence of the exchange rate on the trade balance varies over time. The recent appreciation of the dollar of 20 percent from 2014 to 2016 worsened the trade balance ratio only slightly. The trade balance’s tepid response is likely because of other changes to trade conditions, such as tariffs and regulations. The persistence of the U.S. trade deficit is also noteworthy. Throughout the 22-year span covered in our sample period, the U.S. continuously ran a trade deficit despite the large variation present in the exchange rate. In other words, adjustments to the exchange rate have not removed the U.S. trade deficit even in the long run.

How this graph was created: Search for and add “Trade Weighted U.S. Dollar Index: Broad (TWEXB)” to the graph on the left axis. From the “Edit Graph” tab, add “Exports of Goods and Services (EXPGS) and Imports of Goods and Services (IMPGS) as Line 2. To do this, enter the formula (a-b)/(a+b) in the Line 2 tab. Finally, change the starting date to “1995-01-01.”

Suggested by Yili Chien.

View on FRED, series used in this post: EXPGS, IMPGS, TWEXB

A precise measure of uncertainty?

The Economic Policy Uncertainty Index tries to quantify unpredictability

FREDcast, FRED’s forecasting game, asks players to forecast four major macroeconomic variables by the 20th of every month. Some players may be frustrated by the erratic behavior of some of these indicators as they attempt to make their guesses. Fair enough. Plenty of other data analysts are in the same boat. Well, a team of researchers has been trying to quantify this sense of uncertainty using the Economic Policy Uncertainty Index, graphed above for the world’s five largest economies.

And how, exactly, does one transform a feeling into a number? According to the researchers, articles from major newspapers are analyzed for mentions of uncertainty related to aspects of economic policy, including the decisionmakers themselves, the actions undertaken, and the effects of those policies. The number of articles expressing uncertainty is standardized to the total number of articles written by each source; the accuracy of the resulting index is then tested by making comparisons with relevant indexes constructed through other methods.

The index associates historical events with the economic data. For example, the first significant spike outside of a recession in the above graph shows up in the first quarter of 2003. The spike is highest for Europe and occurred when 10 European countries were in talks to join the European Union under the condition that they’d eventually join the eurozone. The media covered these discussions in a way that uncertainty regarding policymakers, policies, and their effects came across in the index.

In 2008, as the financial crisis was unraveling, there was still much debate on what policies should be adopted and how effective those policies might be. This translated into an elevated index. Soon after, in 2011, the index spiked again in all countries. It’s likely that the uncertainty surrounding the economic and political events at the time, such as the European sovereign debt crisis and the U.S. debt-ceiling discussions, was captured by the index in this case as well.

After 2011, many nations appear to have maintained high levels of economic policy uncertainty that well surpass levels before the Great Recession. The impact of Britain’s vote to leave the European Union, several significant elections around the world, and similar newsworthy events are plainly visible in the all-time highs of the index in the past two years. If you’re not doing too well on FREDcast, you can use the pretty good excuse that there’s certainly a lot of policy uncertainty out there.

How this graph was created: Search for “economic policy uncertainty” and check the boxes next to the monthly series for the United States, Europe, China, India, and Japan. Select “Add to Graph.” Adjust the time range to begin in 1990.

Suggested by Maria Hyrc and Christian Zimmermann.


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