This article analyzes the degree with which the unemployment rate in United States is affected by the openness of the economy. US unemployment rate is measured on a monthly basis by the Bureau of Labor Statistics and the openness of US economy is defined as the share of international trade in U.S. GDP, given by the ratio of Exports and Imports to GDP (TRADE).
Quarterly data on UR and TRADE from year 1973 through 2002 was analyzed using the least square linear regression method to evaluate the effect of TRADE on UR for US economy.
Firstly, our analysis shows that UR and TRADE are inversely related to each other. The correlation coefficient between UR and TRADE was observed to be -0.645855. The negative correlation coefficient value suggests that as TRADE increases and the economy becomes more open, UR goes down. Also, the absolute value of the correlation coefficient (0.645855) is big indicating that there is a clear inverse trend between UR and TRADE.
Secondly, based on the data our model shows that if TRADE increases by one percentage point, we can expect average UR to decrease by 0.17 %. The model estimated the effect of TRADE on UR with a high level of significance (p-value = 0.0000). Also, the coefficient of determination (a tool to assess the fit of the model) was obtained as 0.42, which means that approximately 42% of the variation in UR can be attributed to TRADE.
Lastly, the model estimated that hypothetically if the US economy be closed for TRADE, average UR can be expected to be just over 9%. In other words this means that the average effect of all other variables not included in the model is expected to be 9% on UR.
Before analyzing any deeper, it must be stressed that UR changes as the balance of trade shifts between export and import. This point has not been evaluated in this model but it is expected that UR will decrease when export > import. This is due to the fact that as companies start exporting more, the demand for goods and services increase and consequently they hire more labor to keep up with the increased pressure on production. Similarly, one can expect that UR will increase when import > export because as US imports more goods and services produced in foreign nations, pressure on production eases and as a result companies become more likely to lay-off work-force.
Bottom line, these results show that unemployment rate in US like in any other nation depends on the overall health of the economy and not on TRADE alone. With that said, if all other factors influencing the economy, such as housing market, credit crunch and politics, remain constant such that unemployment rate depends on TRADE alone, unemployment rate decreases as the economy becomes more open to trade. One reason is the fact that as the economy becomes more open to TRADE, jobs are created especially in industries, such as transportation and construction, that support both export and import in some form.
Quarterly data on UR and TRADE from year 1973 through 2002 was analyzed using the least square linear regression method to evaluate the effect of TRADE on UR for US economy.
Firstly, our analysis shows that UR and TRADE are inversely related to each other. The correlation coefficient between UR and TRADE was observed to be -0.645855. The negative correlation coefficient value suggests that as TRADE increases and the economy becomes more open, UR goes down. Also, the absolute value of the correlation coefficient (0.645855) is big indicating that there is a clear inverse trend between UR and TRADE.
Secondly, based on the data our model shows that if TRADE increases by one percentage point, we can expect average UR to decrease by 0.17 %. The model estimated the effect of TRADE on UR with a high level of significance (p-value = 0.0000). Also, the coefficient of determination (a tool to assess the fit of the model) was obtained as 0.42, which means that approximately 42% of the variation in UR can be attributed to TRADE.
Lastly, the model estimated that hypothetically if the US economy be closed for TRADE, average UR can be expected to be just over 9%. In other words this means that the average effect of all other variables not included in the model is expected to be 9% on UR.
Before analyzing any deeper, it must be stressed that UR changes as the balance of trade shifts between export and import. This point has not been evaluated in this model but it is expected that UR will decrease when export > import. This is due to the fact that as companies start exporting more, the demand for goods and services increase and consequently they hire more labor to keep up with the increased pressure on production. Similarly, one can expect that UR will increase when import > export because as US imports more goods and services produced in foreign nations, pressure on production eases and as a result companies become more likely to lay-off work-force.
Bottom line, these results show that unemployment rate in US like in any other nation depends on the overall health of the economy and not on TRADE alone. With that said, if all other factors influencing the economy, such as housing market, credit crunch and politics, remain constant such that unemployment rate depends on TRADE alone, unemployment rate decreases as the economy becomes more open to trade. One reason is the fact that as the economy becomes more open to TRADE, jobs are created especially in industries, such as transportation and construction, that support both export and import in some form.
