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Sunday, June 15, 2008

Higher Exports = Inflation

Paul Krugman points out in a recent post that free trade does not necessarily mean lower prices. He directs us to a Dani Rodrik post from 2007 which makes the case that:

When a country opens up to trade (or liberalizes its trade), it is the relative price of imports that comes down; by necessity, the relative prices of its exports must go up! Consumers are better off to the extent that their consumption basket is weighted towards importables, but we cannot always rely on this to be the case.
Dani later theorized that:
when the U.S. gets better market access abroad for its agricultural exports (a key demand under the Doha round), you can be sure that this will raise domestic prices for these goods, not lower them.
The reason why this is the case can be seen in the following basic "all else equal" example related to Meat X (my personal favorite)...
  • Americans consume a lot of Meat X.
  • Free trade now allows U.S. farmers to export Meat X to Europe
  • The U.S. supply of Meat X decreases
  • The price level of meat X in the U.S. increases (if you don't know why, please go here)
Lets take a look at some real data so you don't just take me at my word... exports of foods, feeds, and beverages have increased dramatically since 2006. In fact the 2007 increase in exports is almost 3x the increase in imports.

So what happened to the price level? When looking at data since 1999 and comparing the speed of this increase (in this case by calculating the change in the year over year increase) to the YoY change in the U.S. Food and Beverage Consumer Price Level, when net exports increased, the food and beverage price level did in fact follow.

Expect to see a lot more on this in the coming months as the election nears...