NCPA - National Center for Policy Analysis

The Case for Trade

February 27, 2004

Manufacturing employment has been declining over the past half-century, even though industrial production has increased more than sixfold between 1950 and 2000 (before falling during the latest recession), according to Chapter 2 in the 2004 Economic Report of the President (ERP).

How can this be? The ERP cites two factors.

  • First, and most significant, dramatic and sustained productivity increases in manufacturing throughout this period generated a huge decline in the price of manufactured goods relative to the price of services.
  • Second, capitalizing on the benefits accruing from international trade, consumers increased their purchase of imported goods, which reinforced the relative price decline of manufactured goods.

Altogether, between 1950 and 2000, "the average price of consumption goods relative to services fell more than 50 percent," the ERP reveals. Nevertheless, the large increase in the consumption of goods noted earlier was still not sufficient to fully compensate for the even bigger relative price decline. Hence, manufacturing's nominal share of GDP declined as consumers' purchases of services soared.

The resulting benefits are unmistakable: "The boost to real income from the relative price decline of manufactured goods [and food] has supported demand not only for these goods," the ERP declares, "but also for services such as health care and financial advice." The indisputable result has been a major increase in Americans' living standards. Chapter 2 clearly deserves far more attention than it has received, notes the ERP.

Source: Editorial, "Outsourcing and Chapter 2," Washington Times, February 27, 2004.

For ERP text


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