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April 1986, 
Vol. 68, No. 4
Posted 1986-04-01

Domestic vs. International Explanations of Recent U.S. Manufacturing Developments

by John A. Tatom

John A. Tatom examines two alternative explanations for the recent behavior of the manufacturing sector. The first, the international explanation, suggests that the rise in the international value of the dollar has reduced U.S. competitiveness, depressing manufacturing output. The second, the domestic view, emphasizes that, while cyclical fluctuations in U.S. real income have led to sharp changes in U.S. manufacturing output growth in the 1980s, overall, manufacturing output has actually been stronger than its relation to domestic income alone would suggest. Tatom’s evidence shows that, after accounting for normal cyclical movements in real income, manufacturing output has been unusually strong in the 1980s. More important, it is positively and significantly related to the appreciation in the value of the dollar. The author explains that these results are consistent with the view that movements in the value of the dollar reflect supply-side improvements in the relative cost of traded goods. Tatom shows that various measures of factor cost and productivity across countries provide additional support for this view. The evidence that Tatom examines does not support the notion that the rise in the dollar has resulted in a loss in U.S. manufacturing output or employment to foreign competitors. Instead, the rise in the dollar appears to reflect U.S. relative cost and productivity improvements that also have raised the U.S. share of world manufacturing output. Tatom concludes that economic policies that promote low inflation and faster, more stable growth appear to be relatively more important for U.S. manufacturing than the exchange rate consequences of economic policy or other exchange rate developments.