US trade miracle: prices unchanged

caroline baum

We need some way to explain a better trade balance without a shift in prices

The last thing we need is the designation of another "new era" to characterise every phenomenon that comes down the pike. That said, we need some way to explain the improvement in the US trade balance with the rest of the world in the past two quarters without the usual shift in relative prices. In the old model, a decline in the value of the currency leads to a change in the relative prices of goods. Consumers substitute domestic goods for imports; exports became more attractive. The improvement in the trade deficit doesn't come right away, however, but eventually the volume of imports d...