$US-AUD Exchange Rate vs Balance of Trade

So far, in recent posts, we’ve examined the effect (or lack of effect) of currency exchange rates between the U.S. and two major trading partners – Canada and China.  So far, the data’s been inconclusive.  In the case of Canada, during the past decade, it seemed possible that there might be some effect.  A falling dollar has coincided with an increase in the surplus of trade (in manufactured goods) for the U.S.  But the U.S. is also ten times as densely populated as Canada.  My theory predicts that the U.S. would experience a surplus of trade in manufactured goods based on this disparity in population density.

With China, there actually seemed to be an inverse effect.  A falling dollar coincided with a worsening of the U.S. balance of trade with China instead of the improvement that economists would predict.  Here, it’s important to note that China is more than four times as densely populated as the U.S. My theory predicts a very large trade deficit for the U.S.

So, so far, the theorized effect of currency exchange rate on the balance of trade is only one for two, while my theory of population density disparity is two for two.

Today we’ll examine the effect of currency exchange rate on our balance of trade with Australia, another major trading partner of the U.S.  Here’s the chart:

$US-AUD Rate vs. Balance of Trade

Here we seem to see some real effect.  From 1993 to 1996, the dollar fell and our balance of trade improved.  From 1997 to 2001, the dollar soared and our balance of trade worsened a little.  From 2002 to 2008, the dollar plunged and both our total balance of trade and the balance of trade in manufactured goods improved dramatically.

But, let’s remember that, once again, the U.S. is ten times as densely populated as Australia.  My theory would predict a trade surplus for the U.S.  Also, at this point, we might need to consider the possibility that, although economists’ theory that currency exchange rates have a direct impact on the balance of trade, that theory may break down when one of the nations involved has a population density far beyond the critical density at which per capita consumption begins to decline.  It may be safe to say that Australia and Canada have not yet reached that density.  The U.S. may have breached it, but perhaps not by much – no more than a factor of two.  However, it’s also safe to say that China is far beyond that point, perhaps by a factor of eight or ten.  So, in the case of trade between the U.S. and Canada and Australia, it may be that currency exchange rate dominates, while in the case of trade between the U.S. and China, the exchange rate effect is dwarfed by the effect of the population density disparity and the fact that China is has, in all likelihood, exceeded the critical population density by a factor of ten.

In future posts we’ll consider the currency exchange rate effect vs. the population density disparity effect with more of the U.S.’s major trading partners.

*****

Exchange rate data provided by http://www.oanda.com/.

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3 Responses to $US-AUD Exchange Rate vs Balance of Trade

  1. MikeF says:

    Pete,

    In the instance of Australia, 70% of the country is classified as arid or semi-arid and therefore much of that nation is uninhabitable and cannot support human population. I would think that “inhabitable density,” would be necessary to paint a clear picture of the relationship between trade, domestic consumption, and population density.

    China on the other hand has 1.4 Billion people who can create a domestic expansion model at the most basic level (one that we passed more than 50 years ago) such as a new bicycle, a washing machine, a motor scooter, etc.

    It should be noted that for China to reach the current consumption level of the U.S. that they would require all known resources on earth and would experience global material shortages before reaching that goal. We’re dancing on the edge of the volcano.

    It is my opinion that man made currency values are more of a smoke screen and a diversion (that indeed makes the rich richer), but has little if any real effect on the macroeconomic physical limitations of a world that is awash in 6.77 billion consumers.

    • Pete Murphy says:

      I agree, Mike, and I think we’ll see that currency valuations have virtually no effect on the balance of trade with densely populated nations when I get into more data from such places. Stay tuned.

  2. MikeF says:

    Pete,

    That would be a great breakthrough to prove that currency valuations are simply a gambling device and a diversion that is tilted heavily toward the house.

    I’ll stay tuned.

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