Impact of China's currency valuation and labour cost on the US in a trade and exchange rate model

Bhattarai, Keshab; Mallick, Sushanta

Abstract

Ricardian dynamic general equilibrium analyses show that under free trade arrangements a low income country with lower wage cost and large endowment of labour has comparative advantage in trade. Efficiency gains from this enhance economic growth and welfare of households simultaneously in both low income and advanced economies. Theoretical predictions are empirically validated here with structural VAR analysis based on quarterly data over the time period 1995:1 to 2009:1 on China's relative wage cost, interest rate differential, real effective exchange rate (REER), relative GDP and the US current account balance. It is shown how the relative prices of labour, capital and the currency affect the economic activity in China and current account balance in the US. With free capital inflows and outflows and restrictions on labour mobility, comparative advantage of China and the trade deficit of the US will both be minimised if China allows real appreciation of the Yuan and complete adjustment in prices. Higher production cost and prices in China could reduce welfare of Chinese households and the trade imbalance of the US, while higher relative GDP of China lowers the current account balance for the US.

Citation

Bhattarai, K., & Mallick, S. (2013). Impact of China's currency valuation and labour cost on the US in a trade and exchange rate model. North American journal of economics and finance, 25, 40-59. https://doi.org/10.1016/j.najef.2013.03.001

• Journal Article Type: Article
• Acceptance Date: Mar 6, 2013
• Publication Date: 2013-08
• Deposit Date: May 14, 2015
• Publicly Available Date: May 14, 2015
• Journal: North American journal of economics and finance
• Electronic ISSN: 1062-9408
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 25
• Pages: 40-59
• DOI: https://doi.org/10.1016/j.najef.2013.03.001
• Keywords: Comparative advantage, Growth, Exchange rate, China, US
• Public URL: https://hull-repository.worktribe.com/output/373869
• Publisher URL: http://www.sciencedirect.com/science/article/pii/S1062940813000417
• Additional Information: This article is maintained by: Elsevier; Article Title: Impact of China's currency valuation and labour cost on the US in a trade and exchange rate model; Journal Title: The North American Journal of Economics and Finance; CrossRef DOI link to publisher maintained version: http://dx.doi.org/10.1016/j.najef.2013.03.001; Content Type: article; Copyright: Copyright © 2013 Elsevier Inc. All rights reserved.