The price of imports has a significant impact on the balance of trade. For example, the price of commodity imports from China has risen 0.3 percent since the end of 2003—less than 0.05 percent per year. By contrast, the price of those from industrialized countries rose 22.8 percent and the price index for all commodities has risen 15.2 percent over the same period. Thus, the relative price of commodity imports from China have fallen, while those from industrialized countries have risen.
Since 2003, the trade deficit with China has doubled from about $10 billion to more than $21 billion per month, while that with Canada, Germany, and Japan has shrunk from more than $13 billion to less than $10 billion per month. This provides even more evidence to support the Economics 101 argument that prices matter to buyers, and therefore exchange rate imbalances are significant drivers of trade imbalance.
Read the entire Prices Byte.