THE U.S. TRADE DEFICIT, UNEMPLOYMENT RATE AND DEBT: AN EMPIRICAL STUDY

Abstract

This paper examines the relationship between US trade deficit, unemployment rate and its national debt between 1980 and 2016. The empirical analysis on the relationship between trade deficit and unemployment was carried out using an Autoregressive Distributed Lag model while that of the relationship between the trade deficit and national debt was estimated using a 2-Stage Least Square estimation technique because of endogeneity problem associated with the model. The variables used in the study include trade deficit, growth rate, unemployment rate, public debt, interest rate, government expenditure, real oil price and foreign direct investment. This variables were tested for stationarity and the result showed that only public debt was I(0) while the rest of the variables were I(1) which justifies the use of the ARDL model for the study. The study finds that a billion dollar reduction in the US trade deficit is associated with about a 0.27 percentage point increase in the Unemployment rate and associated with about a 0.36 percent reduction on the US national debt.