Campbell and Lapham, Seminar Slides, September 2001

1
International Dimensions of Manufacturing
Jeffrey R. Campbell Federal Reserve Bank of
Chicago and NBER
2
(No Transcript)
3
(No Transcript)
4
Employment Consequences of an Overvalued Dollar

• American consumers substitution towards cheap
  imported goods reduces employment in U.S.
  manufacturing industries.
• Import assembled cars. (Knetter)
• Bring the car here one piece at a time (Pali)
• Imported materials become cheaper, increasing
  employment in downstream industries.
• With PTM, U.S. exporters raise their prices,
  perhaps lower their prices, and cut production.
• In competitive markets, exporters lower their
  prices and cut production.

5
World Price, 15
Quantity Supplied, 3
15
Supply Curve
10
5
CHARLIE
ANDY
BOB
0
1
2
3
Jobs/Airplanes
6
Quantity Supplied, 2
15
World Price, 10
10
5
CHARLIE (Lost Job)
ANDY
BOB
0
1
2
3
Jobs/Airplanes
7
World Price, 15
Quantity Demanded, 1
15
Demand Curve
10
5
ZELDA (Unemployed)
XENA
YVONNE (Unemployed)
1
2
3
Flights/Jobs
8
World Price, 10
15
Quantity Demanded, 2
10
5
ZELDA (Unemployed)
XENA
YVONNE (New Job)
1
2
3
Flights/Jobs
9
Summary

• Quantity demanded increases from 1 to 2.
• Quantity supplied decreases from 3 to 2.
• Net exports fall from 2 to 0.
• Andy and Bob (Low cost suppliers) lose. (10)
• Charlie (High cost supplier, Lost job) does not
  lose.
• Xena (High value demander) wins (5)
• Yvonne (New job) does not gain.
• Manufacturing loses one job and Services gain one
  job.
• U.S. cost of the foreign devaluation, 5.

10
Conclusions

• Bivens procedure overstates the trade deficits
  effects on employment.
• Jobs are a poor measure of economic well-being.
• The devaluation costs job losers (Charlie) less
  than survivors (Andy, Bob).
• The devaluation benefits the newly employed
  (Yvonne) less than the previously employed
  (Xena).
• No change in total employment.
• Net cost of foreign devaluation, 5.
• What is to be done?
• Jawbone the exchange rate up. (Effective only if
  the dollar is truly overvalued)
• Lower legacy costs. (Ineffective.)
• Tax service producers to subsidize exports.
  (Makes a bad situation worse)
• Take it on the chin and move on.