Question: What are some uses of Export and Import Price Indexes?

Answer: The primary use for the International Price Program's import and export price indexes is to deflate various foreign trade and growth statistics produced by the U.S. government. Other uses include measuring inflation, as an input to fiscal and monetary policy, forecasting future prices, performing elasticity studies, deriving terms of trade indexes, analyzing exchange rates, negotiating trade contracts, and analyzing import prices by locality of origin.

• Deflating trade statistics: There are three major government trade statistics that are deflated using the export and import price indexes—the monthly U.S. trade statistics, the quarterly Balance of Payments Account (BPA) numbers, and the foreign sector of the quarterly National Income and Product Accounts (NIPA). The International Price Program price indexes can, however, be used to deflate any type of import or export value statistic into real terms.
• Measure inflation: A primary reason for measuring import prices is to track the impact they have on domestic inflation. Movement in import prices can often be an indicator of future inflation since some inputs to domestic production, as well as consumption, are imported.
• An input to fiscal and monetary policy: The Federal Reserve Board frequently uses the import and export price indexes when deciding the nation's monetary policy. In addition, the indexes can be used to determine the impact of trade legislation as part of overall fiscal policy.
• Forecasting future prices: Anticipating future price trends is important to both the business community and individuals doing research on international prices. One important input into any model to forecast price trends is past prices. Although past price behavior is not a perfect predictor of future trends, historical patterns and relationships in the time series would contribute knowledge about the future level of prices.
• Performing elasticity studies: A topic related to measuring industry price changes and trends is the creation of price and income elasticity estimates to distinguish how much of a trade volume change is due to price effects and how much is attributable to income effects.
• Deriving terms of trade indexes: The export and import price indexes can be used to measure the U.S. terms of trade. A terms of trade index is the ratio of an export index over an import index. An improvement in the terms of trade can be perceived as an improvement in competitiveness because imports are becoming cheaper in terms of the country's exports.
• Analyze exchange rates: The export and import price indexes can be used to determine the impact of exchange rate movements on the prices of exports and imports.
• Negotiating trade contracts: International price data have been useful for both multilateral and bilateral trade agreements. Import and export price data have been utilized to negotiate trade agreements for tin, coffee, cotton textiles, oil, and airfreight services. Government agencies that have used the data in negotiating trade contracts include the Department of State, the Department of Commerce, and the office of the U.S. Trade Representative.
• Analyzing import prices by locality of origin: The International Price Program produces import indexes broken out by locality of origin. These can be used to study how economic variables in other regions affect the U.S. economy. One example where a locality of origin index was helpful was the economic crisis in Asia that took place in late 1997. The index of imports from the Newly Industrialized Asian Countries indicated to what degree prices of U.S. imports were impacted by that situation.