Balassa - Samuelson Effect In The Inspection Of China

The exchange rate of RMB is always a hot topic in the world economic, political and academic fields. With China's rapid economic development for decades, its currency value has attracted more and more eyeballs from the world over. The US, Japan, EU and other economic powers impose great pressure on China in order to appreciate RMB, which made the exchange rate of RMB all the more concerned in the world. In recent years, inflation and currency appreciation appear at the same time, which also gives rise to many arguments from academic circle.The nominal exchange rate influences the economy through the real exchange rate, which reflects the economy more directly. So it is important to understand the factors that affect the real exchange rate. Balassa-Samuelson Hypothesis is one of the most important theories in determining the real exchange rate. It says that the difference between the comparative labor productivities of two countries is the main factor that affects the real exchange rate.At present time, China is located in the downside of the industry chain in the international industry divisions, relying heavily on the labor-intensive industries. The effect of labor productivity on the economic development is more direct and visible among productive factors. Therefore it is proper to analyze real exchange rates through productivities. The appearance of inflation and currency appreciation is also a result of Balassa-Samuelson Hypothesis. So the theory is applicable in the current Chinese economic situation.In this paper, we will use theoretical and empirical test to analyze the relationship between labor productivities and real exchange rate, and prove that Balassa-Samuelson Hypothesis effect is notable in China, which shows a close inter-relation between the real exchange rate and the inter-sector labor productivities. The conclusion can be a useful suggestion in dealing with the RMB appreciation pressure, in evaluating RMB properly and in developing the different economic sectors harmoniously.