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International Dimensions of Manufacturing

This article discusses the employment consequences of an "overvalued" dollar in the manufacturing industry. It explores how American consumers' substitution towards cheap imported goods reduces employment in US manufacturing industries and the impact of imported materials becoming cheaper on downstream industries. The article also examines the effects of US exporters adjusting their prices in competitive markets and the overall net impact on employment. Conclusions and possible solutions are also discussed.

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International Dimensions of Manufacturing

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  1. International Dimensions of Manufacturing Jeffrey R. Campbell Federal Reserve Bank of Chicago and NBER

  2. 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.

  3. World Price, $15 Quantity Supplied, 3 $15 Supply Curve $10 $5 CHARLIE ANDY BOB 0 1 2 3 Jobs/Airplanes

  4. Quantity Supplied, 2 $15 World Price, $10 $10 $5 CHARLIE (Lost Job) ANDY BOB 0 1 2 3 Jobs/Airplanes

  5. Quantity Demanded, 1 World Price, $15 $15 Demand Curve $10 $5 ZELDA (Unemployed) XENA YVONNE (Unemployed) 1 2 3 Flights/Jobs

  6. World Price, $10 $15 Quantity Demanded, 2 $10 $5 ZELDA (Unemployed) XENA YVONNE (New Job) 1 2 3 Flights/Jobs

  7. 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.

  8. Conclusions • Bivens’ procedure overstates the trade deficit’s 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.

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