November 1990
Federal Reserve Bank of Dallas

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The Trade Balance and the Real Exchange Rate
John K. Hill

John K. Hill examines how the trade balance and the real exchange rate interact after an economic disturbance. Hill explains how, for disturbances likely to have a significant effect on the trade balance, real exchange rate movements are more the result of a shift in the trade balance than the cause of it. The impetus for change in the trade balance is the disturbance itself. Exchange rate movements are accommodative and, by themselves, account for only part of the total change in the trade balance. Hill concludes that to ask "How far must the dollar fall to balance the trade account?" is to seriously overestimate the extent of needed dollar depreciation.

Reduced Defense Purchasing: Anticipating the Impact on State and Industry Employment
Lori L. Taylor

Despite Iraq's invasion of Kuwait, budgetary pressures in the United States make significant cuts in defense purchasing seem inevitable. Lori L. Taylor analyzes the employment consequences of cutting billions of dollars in defense purchasing. She finds that while certain industries and areas would experience some economic difficulties, job losses would be negligible nationwide.

Taylor estimates the near-term and long-term effects of a 10-percent cut in real defense purchasing. Using input-output analysis, she determines which industries are defense dependent and identifies the impact on employment in each industry. She finds that all industries would lose some employment, but that job losses in certain defense- dependent industries could reach 7.5 percent. Taylor estimates that over time, however, labor displaced by defense cuts would be reabsorbed by other industries. She also finds that all states would lose at least a few jobs in the near term, but that no state would lose more than 0.5 percent of its employment if real defense purchasing declined by 10 percent. Taylor estimates that no state would gain more than 0.35 percent of its employment nor lose more than 0.25 percent of its employment in the long term.