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The exact import price and its implications for the US external imbalance

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  • Fumihide Takeuchi

Abstract

This article calculates the Feenstra's (1994) 'exact price index' for each category of US-imported goods and aggregates them to analyse the US import demand equation for assessing the seriousness of the external imbalance. What distinguishes Feenstra's exact price index is that it incorporates new product varieties. The exact import price index thus calculated suggests that US conventional import prices are biased upwards. The consequent downward adjustment in import prices causes appreciation in the real exchange rate and lowers the excessive portion of imports (the difference between actual and theoretical amounts of imports obtained from the import demand equation). Since the early 2000s, however, the role that new product varieties play in lowering the excessive portion of imports has declined because the impact of new products on import prices has been outweighed by the impact of the spike in primary commodity prices, which has resulted in a substantial depreciation of the real exchange rate. It is possible that this depreciation combined with relatively large excessive imports has caused the subsequent US current account deficit to stop expansion from the late 2000s onwards.

Suggested Citation

  • Fumihide Takeuchi, 2011. "The exact import price and its implications for the US external imbalance," Applied Economics Letters, Taylor & Francis Journals, vol. 18(17), pages 1697-1703.
  • Handle: RePEc:taf:apeclt:v:18:y:2011:i:17:p:1697-1703
    DOI: 10.1080/13504851.2011.560103
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    References listed on IDEAS

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    1. Christian Broda & David E. Weinstein, 2006. "Globalization and the Gains From Variety," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 121(2), pages 541-585.
    2. Sato, Kazuo, 1976. "The Ideal Log-Change Index Number," The Review of Economics and Statistics, MIT Press, vol. 58(2), pages 223-228, May.
    3. Emi Nakamura & Jón Steinsson, 2012. "Lost in Transit: Product Replacement Bias and Pricing to Market," American Economic Review, American Economic Association, vol. 102(7), pages 3277-3316, December.
    4. Paul S. Armington, 1969. "A Theory of Demand for Products Distinguished by Place of Production (Une théorie de la demande de produits différenciés d'après leur origine) (Una teoría de la demanda de productos distinguiénd," IMF Staff Papers, Palgrave Macmillan, vol. 16(1), pages 159-178, March.
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    Cited by:

    1. Janet Ceglowski, 2014. "Has Trade Become More Responsive to Income? Assessing the Evidence for US Imports," Open Economies Review, Springer, vol. 25(2), pages 225-241, April.

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