A Study On The Calculation Of Real Effective Exchange Rate Of China’s Value Added Under Global Value Chains

According to the ministry of commerce statistics,China’s total value of imports and exports was 24.58 trillion yuan in 2015,and it’s still the world’s biggest trading powers.Therefore,whether our commodity prices are competitive not only matters for the exports,but also has important influence on GDP growth.In recent years,however,the extent of vertical specialization is rising over time.The total trade volume of intermediate inputs has accounted for two-thirds of the total amount of world trade.The proportion of imported intermediate inputs in total value of exports has exceeded 30 percent in many countries.World value-added exports are equal to about 70 percent of gross exports today,down from about 85 percent in the 1970s and 1980s.With the ongoing growth of global value chains,therefore,the nature of competition has changed.In conventional frameworks,each country’s differentiated product competes against products from other countries on the markets around the world,however,countries compete over supplying domestic value added to world markets rather than products now.In other words,countries compete over value added of the same production process under global value chains.As a consequence,the traditional real effective exchange rate which is a statistical indicator based on commodity prices can not reflect the competitiveness of the country.Therefore,measuring the real effective exchange rate of our country’s value added under global value chains will be of great importance in improving competition strength and promoting economic growth of our country.This paper firstly reviews the related theories and literature of the real effective exchange rate and the Armington elasticity of substitution which helps to obtain the analyzing framework of this article.Next,this paper briefly introduces the framework of the real effective exchange of value added as well as it’s expression.Moreover,we use the world input-output tables to estimate the production elasticities and the demand elasticity after introducing the estimation method of the elasticity of substitution,which lays the foundation of the calculation of the real effective exchange rate of value added afterwards.What’s more,we analyze the real effective exchange rate of value added that we have calculated explicitly in three aspects——weights,price factors and indices comparisons.At last,the conclusion of this paper is given.The main conclusions of this paper are as follows:Firstly,elasticities of substitution have changed over time.Consumption elasticity declined less than the production elsticities did.In particular,the elasticity of substitution y reflecting the elasticity of substitution between value added and intermediate inputs decreased significantly less than the other two.Secondly,countries in the vertical linkages have become closer and closer,and the degree of vertical specialization has also been increased.Compared with the countries in different regions,countries within the same region cooperate with each other more closely.Thirdly,China has got increasing influence on the world trade.Besides,China has decreased the degree of dependence on a small number of countries and regions which means trade diversification has been promoted.In terms of vertical specialization,China has closer relationship with South Korea than with other major trading partners,and the degree of vertical specialization with other countries has not changed significantly.Fourthly,China has less complementary relationship with countries in "one belt,one road" under vertical specialization.We should cooperate more with countries in"one belt,one road" under vertical production structures,and minimize the competition of the same production process.Finally,the real effective exchange rate of value added we calculate is different significantly from the traditional one.Compared with the differences in weight,differences in price index account for the majority of the differences between the real effective exchange rates.On the other hand,for its own change,it is mainly caused by the change of exchange rate.However,the continuous growth of the value added prices has become an important reason for its rise,which is worth paying attention to.Compared with the existing literature,three aspects of innovation have been made:first of all,we estimate the production elasticities of substitution as well as the consumption elasticity at the country level,which has not been done before.We also investigate whether elasticities of substitution change over time,and explain their phenomena and economic implications.Secondly,compared with the approximation of real effective exchange rate of value added under strong assumption in the original framework,we calculate the real real effective exchange rate of value added using historical data and real elasticities of substitution,which endows value-added real effective exchange rate with realistic guiding significance.Finally,we come to many beneficial conclusions by making empirical analysis using real value-added real effective exchange rate we calculate.