Friday 11 November 2011

ULC and trade deficits

If I focus on ULC in manufacturing (as opposed to total economy) and the trade balance in goods (as opposed to goods and services) I see a strong correlation. It is also interesting to observe that Germany stops to be the outlier in cost dynamics (again for the manufacturing sector).

(click to enlarge)


  1. Dear Francesco, Could you please elaborate? It looks very interesting... Thanks, P

  2. Could you please provide us a more detailed explanation and consequences of your thoughts? Thank you very much.

  3. @ Pedro & Morcego

    Sorry for the late and short reply. Ok my post was short I had hoped that a detailed graph would be sufficient, but here are my thoughts:

    - the fundamental problem of euro imbalances is cost misalignment (transitory and/or permanent) that lead to persistent trade deficits

    -there is some discussion on how to measure "costs". the Euro plus pact focuses on ULC. However it is difficult to find a tight relationship between ULC for total economy and Trade deficits

    -well if you focus on ULC for manufacturing and trade deficits you find a very strong a positive relationship (the more costly you are he higher is your deficit)

    - Attention: this does not mean that ULC in the non tradables are not important! at the contrary, increasing ULC in NT can feed through higher prices -> higher wages -> ULC manufacturing. (but not always from the graph, look at Finland)

    - Achtung: in the manufacturing sector Germany is not anymore the out layer in ULC dynamics (as opposed to total ULC).

    in the next post I'll try to decouple compensations from productivity dynamics