Explaining the persistence of the U.S. trade deficit in the late 1980s

Abstract

The U.S. trade deficit was twice as large a percentage of U.S. GDP in 1989 as in 1979 although the value of the dollar and the level of U.S. demand relative to foreign demand were roughly comparable in both years. This article investigates the reasons for the deficit's magnitude in the late 1980s. Particular attention is given to two prominent theories about the persistence of the deficit, one focusing on the relationship between exchange rate movements and capital stock developments and the other on shifts in the structure of U.S. trade flows.Investments, Foreign - United States ; Capital investments ; Balance of trade