$US-GBP Exchange Rate vs Balance of Trade with the U.K.

Continuing the series in which I am researching the validity of the economists’ claim that a weaker dollar improves our trade balance, we now turn our attention to the United Kingdom and the dollar-British pound (GBP) exchange rate.  So far we’ve seen that, although a weakening dollar does improve our balance of trade when dealing with less densely populated nations, we’ve seen that there is no effect at all with much more densely populated ones.  In fact, if anything, a falling dollar seems to have the opposite effect.  Trade balances worsen. 

But, so far, we’ve only examined a relatively few nations.  So now let’s turn our attention to trade with the U.K.   The U.K. is nearly 7-1/2 times as densely populated as the U.S.  So my theory would predict that changes in exchange rate would have no effect on our balance of trade with them, since the influence of the disparity in population density  would dwarf any effect of changes in exchange rate. 

For some reason, I had a gut feeling that this one was going to fly in the face of my theory.  But that gut feel was wrong.  Here’s the chart:

$US-GBP Rate vs Balance of Trade

As you can see, there is no correlation between exchange rate and the balance of trade with the U.K. whatsoever.  In fact, there seems to a “weak negative correlation,” since changes in exchange rate were more likely to yield the opposite effect upon trade imbalances than what economists would predict (if there is any cause and effect at all).  The correlation score landed almost right on the trend line and strengthened the correlation between population density and the logarithmic decline in the effect of exchange rate.  Here’s the correlation chart, with the U.K. now included:

Theory Correlation Score

It’s hard to overstate the significance of this study.  I’m not aware of any other study that has attempted to quantify the effect of exchange rates on trade imbalances and how that effect may be influenced by disparities in population density.  It’s becoming quite clear that currency exchange rates are powerless to prevent a trade deficit in manufactured goods with a nation that is much more densely populated (by more than a factor of two). 

I’ll continue this series until all of America’s top fifteen trade partners have been included.  Next on the agenda:  South Korea.


Currency exchange rate data provided by www.oanda.com.

3 Responses to $US-GBP Exchange Rate vs Balance of Trade with the U.K.

  1. Peteopolis says:

    I think you have failed to appreciate Zorach’s stunning revelation in a previous post concerning GDP.
    The point is that a financially driven false “service” economy that gooses GDP will guaranteed result in a prolonged dead economy (DEFLATION) of perhaps decades. This is done deliberately because of the gross financial illiteracy and mindless greed of the general public. Population density is irrelevant in this context. The Public loves phoney asset appreciation…that is until the inevitable associated liabilities that came from improper credit creation overwhelm them. Then they are stuck holding the bag as the supranational elite move on to greener pastures (aka next nation to ruin by the same scheme).

  2. MikeF says:

    Perhaps the following statement falls into the population density theory.

    In order to support a large Middle Class in the elevated custom that has been afforded Americans, there must exist two important underpinnings; vast untapped resources and a frontier to settle. We no longer have either.

    The masses are totally ignorant of even basic economics and were therefore easily convinced that globalization was the answer…and it was; the answer to their worst nightmare which will result in 3rd world status in one easy lesson.

    China’s objection to BHP purchasing Potash is in my opinion, the first warning volley over the bow of the coming resource wars; resources that we don’t own.

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