How Does Real Effective Exchange Rate Affect Income Gap Between Urban And Rural

Institution reform and opening up together promote the rapid development of Chinese economy, but also leading to some negative effect. It is a great problem for our society that income inequality becomes larger and larger, especially the income gap between urban and rural area. It is meaning for improving farmers’ income, shorten the gap and our society’s sustainable development to make researching and solve urban-rural income gap problem.Currently, Most research about income gap between urban and rural focused on internal factors of our country, in the era of accelerating integration of global economy, it is undesirable to analysis our income issue in isolation. This paper puts the real effective exchange rate into the research of factors that affect urban-rural income gap, which not only make up the shortfall of study in this field effectively, but also construct a research routine and theory framework about the relationship between international economy relation and different entities represent by urban and rural resident.According to Quartile map described by Geoda, urban-rural income gap of our country is not uniformly distributed on geograph. The western areas’gap is larger than the eastern ones. Beside, Moran’s I statistical result indicates that different region’s urban-rural income gap exist significant spatial positive correlation. In order to exclude estimation bias caused by spatial positive correlation, this paper introduces the Spatial Econometrics model to make an empirical analysis. Considering the regional economy situation, there is huge difference on the main trade partners and commodity price among each province, using a nationwide real effective exchange rate of RMB can’t reflect each province’s exact situation. Therefore this paper calculate real effective exchange rate of each province with the method refer to BIS.Estimation result of spatial econometrics model on Matlab illustrates that real effective exchange rate and urban-rural income gap have robust positive relation. Recent years’ RMB appreciation may lower urban-rural income difference. Different from theory analysis, real effective exchange rate affects urban-rural income gap according to export trade and employment ratio instead of FDI. On the one hand, real effective exchange rate improves income level which worsens urban-rural income difference. On the other hand, it also enlarge employment ratio leading to lower urban-rural income difference. Real effective exchange rate entirely worsen income gap due to its greater effect on improving wage level.The empirical result also indicate that urbanization, second and third industry employment ratio and export scale are significant negatively correlated with urban-rural income difference. Inflation rate, urban wages and education level are positive correlated with urban-rural income difference. In addition, FDI ratio of the entire economy is small, and their relation is not significant. Different from traditional view that economic development and income difference have alternative relation, empirical result indicates that the relation between economic growth rate and income difference is not significant. They change jointly because of the same other factors which illustrates that lowering urban-rural income difference alone may not affect economic development.