The Applicability Of Comparative Study Of The Real Exchange Rate And The Bs Exchange Rate

As a major economic variable in the field of international finance, the real exchange rate is the most leading price indication when a country is engaged in international economic affairs. Compared with the nominal exchange rate, the real exchange rate not only directly reflects the change of real economic conditions of a country, but also influences one's marcoeconomy and balance sheet. Hence, the study of the real exchange rate is very eventful for making macroeconomic policies of a country. In existing researches of the real exchange rate of RMB, the application that the real exchange rate is used as a benchmark to examine the movement of the nominal exchange rate is of great importance. When the nominal exchange rate keeps constant, the relative price-level change of the two countries will cause the real exchange rate to change, which makes the real exchange rate deviate from the nominal one. And this is the nominal exchange rate's overvaluation or undervaluation relative to the real exchange rate.Currently, most of scholars use the external real exchange rate definition built up on PPP theory to estimate the real exchange rate. This definition of real exchange rate uses various total price indexes to show the domestic price of commodities and service of a country, which is the purchase power of the domestic currency. This calculation method is generally accepted since the data is easy to get and the calculation equation is quite simple.Meanwhile, with the notable growth of Chinese economy, the substantial increase in productivity of the tradable sector in China attracts many scholars'attention to the existence of the Balassa-Samuelson effect, and they extend the PPP theory according to the two-sector classification of this effect. This classification clearly describes the transmission-mechanism of BS effect: because of the rapid growth of dual productivity, if the wage of the tradable sector increases with the productivity synchronously, the price of tradable goods keeps constant while the price of non-tradable goods increases. In this case, the country's general price level which is consisted of both the tradable and non-tradable goods becomes higher than that of the foreign country. Thus, the real exchange rate of this country rises up eventually. This paper builds up the real exchange rate-BS exchange rate reflecting this effect intuitively by the use of the two-sector classification of BS effect. However, the calculation process is rather complicated. We need to identify the two-sector classification and define the weights of the tradable and non-tradable goods in all the commodities in the country. Different methods in calculating of the two real exchange rates make the difference when they are used to estimate the extent of deviation of the nominal exchange rate. This paper tries to analyze the feasibility of both the RMB real exchange rate and RMB BS exchange rate in China by comparing the deviation of RMB real exchange rate from nominal exchange rate with the deviation of RMB BS exchange rate from nominal exchange rate, and the difference between the RMB BS exchange rate and the RMB BS exchange rate as well.Compared with the existing researches, this paper does the following trials:Firstly, this paper provides a new perspective to examine the feasibility of BS effect in China. In order to test the existence of BS effect, the researchers usually extend the BS model by relaxing the hypothesis or set the productivity as explanatory variable as to find out the relationship between the change or relative change of the productivity of two-sector and the change of real exchange rate. Based on distinct calculation methods, this paper examines the difference of disequilibrium between using the benchmark of the real exchange rate of RMB and the BS exchange rate of RMB. As for the paradox that the different calculation methods have similar results, this paper provides an explanation by analyzing the feasibility of the BS effect in China.Secondly, the objective of this paper not only fills in the blank academically, but also has strong practical implications. At present, only a few scholars make use of BS effect to extend the PPP model and few of them utilize it to study the real exchange rate calculation. Hence, the theoretical blank in the existing researches will be filled by the BS exchange rate established by this paper effectively. Also, the conclusion of this paper, the result of the comparison on feasibility of the RMB real exchange rate and RMB BS exchange rate policies, provides a good reference for the future development of our government's exchange rate policy and the scholars'academic study.Based on the research objective, taking the Sino-US exchange rate for example, this paper compares the feasibility of both the real exchange rate and BS exchange rate policies, and focuses on the relationship among the real exchange rate, the BS exchange rate and nominal exchange rate of RMB. It is comprised of six chapters:As an introductory section, Chapter I introduces the topic's background and its implication, defines the objective and scope of this paper, states the technical route and the breakdown of the chapters, points out the research methods and data sources, and summaries the innovations and shortcomings of this paper.The sectionâ… andâ…¡in Chapterâ…¡review the existing study of the real exchange rate of RMB and the RMB BS effect systematically, and analyze the reference implication and flaws of existing researches. And sectionâ…¢describes the classification of two-sector and the concept of productivity and clarifies the standards and definitions to be used in this paper.Chapterâ…¢focuses on the study of the real exchange rate and nominal exchange rate of RMB. In Sectionâ… , various definitions of the real exchange rate are introduced, and the Sino-US bilateral external real exchange rate is selected as the definition when calculating the real exchange rate and BS exchange rate of RMB. In sectionâ…¡, three external real exchange rate calculation methods are introduced, which are the expenditure method, cost method, and tradable goods measurement method. This section also introduces the internal real exchange rate by proxy variable and compares the pros and cons of four methods as well. Based on this, this paper estimates the real exchange rate using the expenditure approach and the cost approach, and defines the result derived from expenditure approach as the comparative object of the RMB BS exchange rate. Sectionâ…¢analyzes the trends of the nominal exchange rate and real exchange rate of RMB respectively, and tests the differences of both from three dimensions based on a clear definition of the difference test.Chapterâ…£focuses on the study of the RMB BS exchange rate and nominal exchange rate. Sectionâ… introduces the BS effect comprehensively and provides the expression of the BS exchange rate definition. Sectionâ…¡briefly clarifies the definition and introduces the calculation method of the BS exchange rate, and identifies the weights of tradable goods among all the commodities in both China and USA on the base of the two-sector classification by De Gregorio,Giovannini and Wolf (1994), and measures the RMB BS exchange rate by the use of price indexes and the nominal exchange rate. Sectionâ…¢analyzes the trend of RMB BS exchange rate and tests the difference between the BS exchange rate and nominal exchange rate of RMB from three dimensions based on a clear definition of the difference test.Chapterâ…¤focuses on the comparative study of the real exchange rate and BS exchange rate of RMB. In Sectionâ… , the results of two tests are compared from the degree of deviation and closeness of fit. It is noted that the divergence between the BS exchange rate and the nominal exchange rate of RMB and the divergence between the nominal exchange rate and the real exchange rate of RMB are very close. The further research shows that the real exchange rate and BS exchange rate of RMB are highly related. Sectionâ…¡examines the relative increase of manufacturing productivities in both China and US and the relative growth of the wage and productivity in Chinese manufacturing sector. It is indicated that the main reason for the little difference between the real exchange rate and BS exchange rate of RMB is Chinese wage-level disproportional increase with the rise of productivity. Section III analyzes the specific conditions of China, and points out that the reason for insignificance of BS effect will exist for a long time. Hence, we can use the RMB real exchange rate directly to examine the degree of overvaluation or undervaluation of RMB nominal exchange rate. Section IV is the summary of this chapter.Chapter VI summarizes the key conclusions of this paper.