AP NEWS
Related topics

Some Economists Blame ‘J-curve’ for Widening Trade Gap

March 24, 1986

NEW YORK (AP) _ Some economists say the United States is riding the ″J-curve,″ a perverse glitch that could help explain why the nation’s trade deficit is rising at the same time the dollar falls.

Americans were told the yearlong fall of the dollar would shrink the trade gap by boosting exports and cutting imports. So far, it hasn’t happened.

According to the J-curve explanation, the first effect of a dollar decline is to cut the money earned from exports and increase the cost of imports.

A graph of it looks like the letter ‘J,’ with the nation’s trade balance worsening for a period before straightening out and then improving.

As J-curve believers might have predicted, the U.S. merchandise trade deficit set a record of $16.5 billion in January, the most recent month reported by the Commerce Department.

Most economists say real improvement in the trade deficit will not be seen until the second half of this year, long after the dollar’s peak in late February 1985.

″The J-curve is a well-recognized phenomenon,″ said Robert Lawrence, an economist at the Brookings Institution in Washington. ″The crucial argument is that prices adjust more quickly than quantities.″

Say the dollar falls 30 percent against the Japanese yen. That means it costs Americans more to buy Japanese products, and U.S. exporters receive fewer dollars for goods they sell to Japan. For a while, the U.S. trade account with Japan worsens.

In the long run, Americans will buy fewer Japanese imports because they have gone up in price. The Japanese will buy more American imports because they are cheaper. The trade balance will improve.

The change in buying patterns takes time, however. Long-term purchasing contracts and the habits of buyers slow down the switch.

Also, with the dollar falling, some Americans may hurriedly buy extra Japanese products before they go up in price. The Japanese may wait to buy American products, expecting prices to drop.

Finally, some U.S. companies reacted to the overvalued dollar by closing factories or moving production overseas. Reversing those decisions could take years.

Some economists doubt the J-curve is a factor. Since foreign companies did not lower prices much when the dollar rose, they should not need to raise them much now that the dollar has fallen, said David Lund, a Commerce Department trade analyst.

″It’s Newton’s other law: What didn’t go down can’t come up again,″ Lund said. ″Economists learn J-curves in school. But it’s a theory, and it’s a theory that’s more and more questionable.″

End Adv Sunday March 23

AP RADIO
Update hourly