Research On The Relationship Of Exchange Rate And Trade Balance By Introducing Expectation Factor

Exchange rate is the most important comprehensive price index used in international economy transaction and executes the function of transforming price. So it becomes the most important lever of regulating trade balance. Therefore many countries take exchange rate as an adjustment instrument in order to regulate trade balance. The effect of exchange rate is more and more apparent.Long-term trade surplus between China and the United States has aroused wide attention from the U.S. government and society, and requiring the appreciation of the RMB. July 21, 2005, the Chinese government changed the formation mechanism of RMB exchange rate, and made a one-time appreciation of 2.1%. Since then, the RMB against the U.S. dollar continued to appreciate. Theoretically, in the Marshall-Lerner Condition, the appreciation of the RMB can rectify the trade imbalance in our country, that is, our country's trade surplus should be reduced. But in fact, China's foreign trade surplus continued to increase after the change.This paper reviews the relevant theories and research. On this basis, this paper set up a mathematical model by introducing the government intervention and consumer expectations and other factors. Model assumes the assumption of the Marshall-Lerner Condition is established, and the exchange rate movements effectively transmitted to the prices of tradable goods. This mathematical model can explain the particular situation about currency appreciation and the further expansion of trade surplus. Analysis of mathematical model has confirmed that the continued appreciation of the exchange rate will lead to further expand trade surplus with the existence of government intervention and consumer expectations.For the results of analysis of mathematical model, this paper analyzes the sample data between Japan, China and the United States. Quantitative methods include ADF Unit Root Test and Engle-Granger Two-Step Tes. The empirical results show that the Japan-US trade data support the model conclusions, but the China-US trade data do not support the model conclusions. Finally, this paper makes comments on the influence of exchange rate on export and gives some suggestion on the basis of the results of above analysis.