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Original Articles

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

Pages 1697-1703 | Published online: 08 Apr 2011
 

Abstract

This article calculates the Feenstra's (Citation1994) ‘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.

JEL Classification:

Notes

1The problems of publicly available import price data cannot be restricted to the way the indexes deal with newly traded products. In this respect, see Nakamura and Steinsson (Citation2009). Consequently, it is not proper to attribute the difference between the public data and the exact price index which this article re-examines only to the question of whether new product varieties are incorporated. This study compares two kinds of prices, exact and conventional price indexes both of which are derived theoretically from the Constant Elasticity of Substitution (CES) utility function and can affirm the importance of taking new products into account because the only one difference between the two indexes is the introduction of new products.

2See Feenstra (Citation1994, pp. 163–5).

3For the years 1989 and 1990, year-to-year comparisons of prices are not available due to data constraints. The average per annum rate of change of the two periods of 1974 to 1988 and 1990 to 2006 therefore applied.

4There have been significant price rises in Mineral products (HTS code 5) and Products of the chemical or allied industries (HTS code 6).

5In the exact import price index, traded goods are treated as differentiated across countries of supply for each good as in Armington (Citation1969), as mentioned above. Conversely, domestic products are all produced in the United States, and this article assumes that the domestic price index does not need to take new product varieties into account in this model's framework. It therefore uses the Gross Domestic Product (GDP) deflator.

6The estimation for is made with import volumes divided by the activity variable as a dependent variable.

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