Balassa - Samuelson Effect In The Applicability Of Research

Balassa- Samuelson effect (i.e. B-S effect) considers that with the rapid development of the economy, the improvement of productivity will make the real exchange rate appreciate. For the past few years, many studies about the real exchange rate have been centered on this effect and the requirement for the appreciation of RMB is basically based on it. However, whether the B-S effect is applicable for analyzing the Chinese economy is still under dispute and there is no conclusion. Therefore, the study on this effect is meaningful when it comes to the research about the Chinese economy and the real exchange rate.This paper begins with the analysis on the background and theoretical development of B-S effect, and then makes a further discussion about the theoretical structure and logic reasoning. By deriving the model of this effect and testing it with Chinese data, this paper examines the applicability of Chinese economy about this effect. However, we find from the result that B-S effect cannot fully reflect the development of Chinese economy and the linear relation between the relative productivity between different countries and the real exchange rate in China is not significant. To find out the reason, this paper deduces from every process of inference of B-S effect by using a series of linear test and data analysis. At last, we find that there are mainly two reasons for the inapplicability of B-S effect in China:the special dual economic structure in China and the different demand structure. Therefore, this paper extends the B-S effect basing on the analysis. According to the gradual reasoning, the paper amends the hypothesis and reconstructs the model by deducing the behavior of the labor, producer and consumer from both angles of supply and demand. With the new extended model, we input the historical data and it is proved that the extended model greatly improves the interpretation of the real exchange rate, and it also intensifies the conclusion that B-S effect is not applicable for China.