ABSTRACT
In bygone decades, before the United States became a leading participant in the present global economy, labor-market behavior and employment outcomes could be studied in terms of an insulated domestic economy because net exports represented a negligible component of aggregate demand. Historically, foreign markets provided only a small percent of the total market for the domestic output of goods and services, and the American demand for foreign imports was similarly small. As shown in Figure 5.1, “U.S. Trade as a Share of Real Gross Domestic Product,” the importance of trade to the U.S. economy has been rising steadily over the last three decades and, as of the end of 1992, the share of exports of goods and services as a percent of real GDP had risen to a high of 11.6 percent. Between 1985 and 1993 U.S. merchandise exports increased from $222 billion to $460 billion in current dollars, which constituted a 95 percent increase in real terms. Merchandise imports have also grown significantly, reaching $593 billion in 1993, which amounted to almost a $133 billion net import shortfall on current account in the U.S. international balance of payments. While the import gap is substantially smaller than it was between 1983 and 1986, when imports were rising and exports of goods and services were declining, any gap represents a deduction from aggregate demand and the employment level it supports. A net trade deficit has the power to reduce employment levels because it is a deduction from aggregate effective demand. Not only are there “spending effects” that derive from the loss of export revenues, but these effects are reinforced by the “world price effects” that follow when foreign competition lowers the price of a manufactured good relative to the prices of manufactured goods generally. 1
