2. Theoretical Considerations
3. Germany’s Trade Surplus Model
3.1. The Methodology
3.2. The Data
3.3. Discussion of the Estimation Results and their Implications
This report analyses the impact of the real exchange rate two years beforehand and the GDP on Germany’s trade surplus between the second quarter 1993 and the first quarter 2007. It is found that both factors had significant impact on Germany’s trade surplus during the analysed period. Use of a piecewise linear regression technique, moreover, identifies changes in the development of Germany’s trade surplus over time. A temporary downward shift in the consistent growth trend of Germany’s trade surplus between the first quarter 1998 and the fourth quarter 2002 is seen to be due to changes in Germany’s fiscal and monetary policy during the introduction phase of the Euro.
The real exchange rate is important for international business as it measures changes in a country’s competitiveness due to differing inflation rates among countries. Economic theory suggests that a drop in a country’s real exchange rate has a positive effect on its amount of exports, whereas an increase in real exchange rate causes exports to drop. Over the last four years Germany has been the world’s top exporting nation with exports (f.o.b.) mounting to € 896 billion in 2006 (IFS, 2007). However, while the country’s exports have continuously been growing since the reunification of West and East Germany in 1990, its CPI-based real exchange rate has seen considerable fluctuations during the same period (see Exhibit 1). Increasing from a base index of 100.0 in the second quarter 1991 to a peak of 117.9 in the second quarter 1995, it dropped to an index as low as 93.3 in the fourth quarter 2000 before moving back to a level slightly above 100 in early 2007 (IFS, 2007). Hence, no obvious relation can be determined between the development of Germany’s exports and its real exchange rate.
A further trade-related variable that has been suggested to develop dependant on a country’s real exchange rate is the trade surplus. Lecraw (1997) has identified an inverse relationship between the development of the U.S. real exchange rate from 1970 to 1993 and the US trade deficit lagged by two years. The author included a lag of two years in his analysis, because the time it takes importers and exporters to switch suppliers allows them to respond to changes in the real exchange rate only some time after the changes have occurred. This delay is due to the need for certain orders to be placed several months in advance as well as long- and medium-term contracts between buyers and suppliers. Having witnessed considerable improvements in information and communication technology over the last two decades a time lag of two years is increasingly regarded as too extensive to give a realistic representation of today’s business environment. However, this study will still include a time lag of two years. This is regarded appropriate as a great percentage of Germany’s trade is related to capital- and technology-intensive machinery that requires orders be made long before the actual delivery and payment of the product. Support for this reasoning comes from research conducted by Junz and Rhomberg (1973) who assert that the “delivery lag” (p.413) regarding high-technology equipment is most properly measured in years rather than quarters.
Yet, the trade of high-technology products implicates a further notion as well, that exchange rate changes do not have much impact due to the necessity nature of the traded goods. Still, one goal of this study is to determine whether a correlation between Germany’s real exchange rate and the development of its trade surplus lagged by two years exists.
With the real exchange rate being only one out of many possible variables to affect a country’s trade, this report will additionally include a second one in the analysis. This further explanatory variable will be Germany’s gross domestic product (GDP), as by definition a country’s GDP is related to the amount the country trades (GDP = C + I + G + NX; NX = TS = X – M).
The objective of this paper is, hence, to examine the impact of the real exchange rate two years beforehand and the GDP on Germany’s trade surplus between the second quarter 1993 and the first quarter 2007.
- Quote paper
- Jens Hillebrand (Author), 2007, Trade Surplus in Germany, Munich, GRIN Verlag, https://www.grin.com/document/87790