THE RELATIVE PRICE OF TRADABLES AND NONTRADABLES AND THE US TRADE BALANCE

The real exchange rate is defined as the relative price of nontradable s and tradables. An index of the relative price is constructed for the U.S. and used to explain net exports. The index appears to perform be tter in explaining net exports than a comparable purchasing power pari ty real exchange rate. The relative price of nontradables, in turn, is shown to be cointegrated with a set of variables that drive the deman d for and supply of nontradables. These variables capture long-run str uctural and demographic changes of the U.S. economy, such as the incre ased demand for medical services.