A Research On The Influence Of Labor Productivity To RMB Real Exchange Rate

The real exchange rate is a vital variable in the open economy. It can not onlymeasure the actual purchasing power, but also can reflect the actual competitiveness of acountry’s goods. With the continuous improvement of openness, the importance of realexchange rate to China’s economic development is also increasingly prominent.Balassa-Samuelson effect explores the influence of labor productivity on the realexchange rate, providing us a path to explore how the exchange rate was influenced fromthe perspective of the real economy.Traditional Balassa-Samuelson effect investigates how labor productivity affects thereal exchange rate, from the perspective of the deviation between real exchange rate andPPP. However, we found that the traditional Balassa-Samuelson effect is not fully adapt tothe actual situation in China. Therefore, we firstly relax the assumptions of the traditionalBalassa-Samuelson effect, and then build the correction model of Balassa-Samuelsoneffect based on China’s national conditions. Taking the actual conditions of China intoconsideration, the new model examined the Balassa-Samuelson effect under theassumption ofwT wN, and amendments to the model to make a preliminary analysis ofthe impact mechanism.In this paper, we use data of1978-2011to examine the correctedBalassa-Samuelson effect. In the part of selecting variables, the paper chose variableswhich are more appropriate for the model. In the part of empirical, the long-runequilibrium relationship was verified through cointegration methods, the paper also furtherinvestigate the relationship by establishing a mechanism to inspect whether ashort-term deviation will be corrected. According to the correction Balassa-Samuelsoneffect, when the Chinese tradable sector labor productivity grew faster than thenon-tradable sector labor productivity, the RMB will experience evaluation. With theimprovement of rural surplus labor and the segmentation of labor market, trade sector can’t maintain the low level of wages any more. Wage of trade sector will be adapted to itslabor productivity. Finally, wage levels will gradually be adjusted to the labor productivity,push up the overall price level, causing domestic inflation and RMB appreciation. Basedon the above conclusions, China should further accelerate economic restructuring,deepening the exchange rate system, in order to cope with possible appreciation of theRMB real exchange rate.