The Effects Of Labor Productivity On Real Exchange Rate

The Balassa-Samuelson effect studies about the real exchange rate in the long run from the perspective of labor productivity improvement, pointing out that when the domestic relative productivity between tradable sector and non-tradable sector is higher than the foreign one, the local currency usually experiences an appreciation. Since1978, China’s economy has been growing rapidly and the labor productivity-continues to improve. Many studies say that the RMB should appreciate, according to the Balassa-Samuelson effect. However, it’s inconclusive to say whether or not the B-S effect can be applied to China. Most studies are based on the empirical test of China&USA. But in this article, we test the B-S effect in a panel date of7developing countries, which is significant to learn more about the relationship between the real exchange rate and level of economic development.Based on the theoretical studies of the B-S effect, we select7typical developing countries and USA as a reference country to test the B-S effect. The empirical test contains three parts:part1tests the existence of B-S effect and the two steps of transmission process; part2tests the assumption of the PPP of tradable price; part3tests the B-S effects in the new modelThe empirical test shows that:the B-S effect doesn’t exist in the7countries; however, the two steps of the transmission process of B-S effect exist in6countries except China. This paradox is coursed by the fact that the PPP of tradable products isn’t hold in any of the7countries. The B-S effect significantly exists in the6countries except China when the deviation of tradable price to the PPP is taken into the model.Because the first step of the transmission process of B-S effect doesn’t exist in China, which means the improvement of relative productivity doesn’t result in a rising of the relative price between non-tradable products and tradable products. The B-S effect doesn’t exist in China, whether or not the deviation of tradable price is taken into consideration.