Download The Research of Exchange Rate Change, Export Structure and

The Research of Exchange Rate Change, Export Structure and
International Trade Welfare Effect
，
，
GU Guoda ZHANG Zhengrong LI Danyu
College of Economics Zhejiang University
[email protected]
，
：
Abstract This paper considers the status of REM’ evaluation, and conceives an imperfect- competition
model to analysis the effect of exchange rate variability to trade structure, employment of export
industries and the welfare of the country (modeling China) whose labor supply is infinity. Through the
research, the paper finds that evaluation of the country’s currency is not propitious to enhance the export,
employment of export industries, and the country’s welfare. The effect of exchange rate variability to
different industries with different factors intensities is different. Exchange rate variability will change
the trade structure of a country. The greatest extent of trade quantity been affected by exchange rate
variability appears in the export industry of labor intensive, but with a certain quantity of capital factor.
The employment and welfare of labor intensive industry is easy to be affected by exchange rate
variability.
Key words Exchange rate variability, Trade structure International trade welfare effect Employment
of trade department
：
，
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The research for international trade pattern and structure is a long lasting subject of international
economics. In the Heckscher-Ohlin’s trade theory framework, the international trade structure is subject
to the factors endowment of different country. 1 Paul Samuelson etc. constructed an two-factors,
two-departments analytic model, which gradually became the base of modern international trade theory. 2
Nowadays, the flow and re-combination of factor endowments are gradually changing their status and
amount in all kinds of countries, thus change the international trade structure all over the world, and
augment the imbalance of the world economy. More and more researchers pointed it out that the
imbalance of the world economy3 is up to the imbalance of trade structure of different countries, which
mainly behaves as the trade surplus of Asia countries and the trade deficit of America. The imbalance of
trade flow and structure reflects the status of re- combination of factor endowments of the whole world.
The different amount and liquidities of different factors brings on the flow and structure change of
factor-endowments, which induces the imbalance. Some researchers took the infinite supply capability
of America’s dollar and the infinite supply capability of China’s labor factor as the cause of imbalance
of the world economy.4
The exchange rate variability changes the comparative price of trade commodities. It can also change
the comparative price of different factors in one country. Thus the comparative advantage of a country is
changed with the change of capital/labor ratio in production. As to China, the export of corporations has
account for 54.7%% of the whole export in 2005. And the outward processing trade has account for
54.7%. The international flow of capital and its combination with domestic labor has being the crucial
causation of the increase of China’s export and economy. Low exchange rate of RMB has been spurring
the inflow of capital and outflow of products in the latest 25 years.
1
Heckscher,E.F.1919. "The Effect of Foreign Trade on the Distribution of Income."Economisk
Tilastirift. In Hechscher-Ohlin theory.Heckcher,E.F.and B.Ohlin. Cambrige, MA:The MIT Press,1991.
2
Jones,R.W.1965. "The Structure of Simple General Equlibrium Models." Journal of Political
Economy.73:6,pp.557-72
3
Ricardo J. Caballero Emmanuel Farhi Pierre-Olivier Gourinchas An Equilibrium Model of “Global
Imbalances”and Low Interest Rates NBER working paper, February, 2006
4Huamin: The spring mechanism of World Economy Imbalance and the choice of China,International
economic Rreview
：
，
751
（
）
This paper’s analysis is based on the work of Dornbusch(1987), Venables 1990 ,and Jayant Menon
1996 . It is assumed as a two countries(A-B) and two factors (K: capital L: labor model.5 The
labor’s price in country A is w . It is said that the labor supply in country A is infinite. The w can be
regarded as the living cost or the minimum wage the government regulated. The labor factor can flow in
the country freely without cost, but can not internationally. Capital’s price in country B is r . Anyone
can get capital with the price r in country B. And capital factor can flow in the country and
（
）
－
）
internationally freely without cost, which means anyone in the country A can get capital with price Er ,
where E is the price of one unit of money in country B in country A. As to a firm of country A, it can
get both infinite labor and capital with the prices of w and Er . Under the former assumptions,
capital flows from country B to country A, and commodities flows from country A to country B, which
is the cause of nowadays world economy imbalance. And the imbalance commodities trade factor
content trade6 flows reflects on the imbalance of factors flow globally, and the process of the gradually
utilizing labor in the country lack of capital. Go with the process, great manufacturing and exporting
capability is engendered, take China as an ensample, if the global-widely flow of capital factor,
technique factor and management factor needs no cost, the great manufacturing and exporting capability
will not localized on the labor intensive industries only, but in all kinds of industries also. Now, we
regard the different intensity of factor content for different commodity as the symbol of different trade
commodity. The schematics of different factor content proportion of different trade commodities
describes one country’s export structure. The export structure of country A is up to 3 matters as the
following. The viscidity of capital flow internationally and its cost. The substitution extent of
labors in different industries. The exchange rate, which denote the relative price of different countries.
In this paper, we regard the capital can flow feely internationally without cost, and the labor can do
all kinds of work in different countries, and analysis the effect of exchange rate variability on the
trade structure and the welfare of export.
（
）
①
1
①
②
③
③
②
A model of the effect of exchange rate variability on the trade structure
This paper takes an export industry which produces commodity i with the Cobb-Douglas production
function as research object. We assume that all firms produce the same product in one country are all the
same. One representative firm produce commodity i as the following:
q = f ( k , l ) = Ak a l b
For the convenience’s sake, we take
function:
q = A(
（1）
a + b = 1 , thus: with the profit-maximum condition
w a a
鬃
) l
Er 1- a
，，we get the
(2)
As the assumption in Cournot’s model, we regard the price of commodity i in country B’s market is:
p = a − bQ ， a > 0, b > 0, Q > 0, a ٛ bQ
(3)
n
In the all N firms which offer commodity i to the market of country B, b is the number of
5
Krugman P.R.,etc.: International economics, Beijing: Economic science publishing company, 2002
Elhanan helpman.1999,The structure of foreign trade” Journal of economic perspective,vol.1 no.2
spring,1999
6
752
n
domestic firms of country B, they are all the same. And a firms are of country A. na + nb = N .
The profit-maximum condition and the first order condition (FOC), we get:
q=
w r (1- a ) a
1
1
[ a - bnb qb - 鬃
(
) (
)ٛ E a - 1 ]
A
wa
2bna
1- a
(4)
（4），we get the marginal effect of the change of exchange rate on the change of the
country A’s export quantity of commodity i to country B. Thus，
With function
¶(
¶Qa
)
¶E = - A- 2 ?D
¶A
0
(5)
D is a positive constant value with the change of A . It means the more technology used in an industry,
the effect of exchange rate variability on its export quantity is less. Different a ( 0 < a < 1 ) denotes
the different content intensive in the export commodity, the bigger the a , the more capital intensive the
commodity. We take the A of all commodities as the same constant value. Then we take a i
i 1, 2 M as the representation of commodity i ,or industry i . From (11) we get the
（= … ）
，
elasticity of exchange rate change to export quantity change, the equation is as the following:
¶Qa Qa
e=
=
¶E E
E a - 1w( r (1- a ))a
( a - bQ(1-
Qa
1
)) A(a w)a - w( r (1- a )) a (
)E a - 1
Q
1- a
(6)
¶e
> 0 ,it means the more the market volume of commodity i in country B, the more the effect
¶Q
Qa
of exchange rate changes to its export quantity. In the assumption, Q means the market share of
¶e
commodity i from country A in country B, thus
< 0 means the more the market share of
Qa
¶( )
Q
commodity i from country A in country B, the less the effect of exchange rate changes to country A’s
export quantity.
According to 6
we get the marginal change of ε when
export structure changes when exchange rate fluctuates.
（ ），
α
change, this show the changing of
E a - 1r a w1- a 1 a a
Er 1- a
?e
1
=
鬃
(
) [ln( ?
)
]
a
1- a
A(a bnb qb )
w a
?a
For
g (a ) = ln(
0< a < a * ,
¶(
Er
a
1
) - ln(
)w
1- a
1- a
is
descending
when
（7）
a Î (0,1) , when
¶Qa
¶Q
¶Q
)
¶( a )
¶( a )
¶E > 0 ; 1 > a > a * ,
¶E < 0 ; a = a * ,
¶E < 0 .
¶a
¶a
¶a
With
different a , the extent of the increase (decrease) of export quantities when country A’s currency
753
devaluation (evaluation), thus the exchange rate variability changes the trade structure of country A. As
Chinese status in quo,7 we get graph 2. It is shows that when a = a * = 0.273 , the extent of export
quantity changes most when exchange rate changes.
The effect of exchange rate fluctuation to country A's
export structure
0
0.07 0.14 0.21 0.29 0.36 0.43 0.5 0.57 0.64 0.71 0.78 0.85 0.92
1
a (Factor intisity)
：
Graph 1 The effect of exchange rate variability to country A's export structure (the diagram of different extent of
exports of different commodities with different factor intensities been affected by effect of exchange rate variability)
The effect of exchange rate variability to the trade structure reflects the comparative prices changes of
commodities and factors when the flow and re-combination of factor endowments are carrying through.
The country with infinite labor could get capital factor under the international capital price. The
evaluation (devaluation) of country A’s currency not only raises (reduce) the price of its product in
international market, but also raise (reduce) the labor cost in name of currency B. The capital price in
international market is not changes, but the comparative price in the domestic factor market of country
is changed. Thus the ratio of capital and labor in production is changed too.
Based on the former analysis, it is clear that the devaluation of its currency is in favor of the export of
country A. Exchange rate variability affects different to the extents of different commodities with
different factor intensities, thus changes the trade structure of country A. Overall, Exchange rate
variability affects the labor intensity commodity’s export extent more than the capital intensity export
commodity’s , and in favor of the increasing of the ratio of high- technique product in the export
structure.
The most affected export commodities is the labor intensive one but with certain capital factor
·
( U (a = a * = 0.273) ). That is just the most mass export commodities of China, such as textile,
clothing, shoes, and plastic product and so on. The pure labor intensive commodities are affected by
7
＝
We assume E=8, w 1000 and r
＝1000/8, Aa=1000000, and
754
a - bQ(1-
Qa
a
)=
2.
Q
exchange rate variability too, such as farm produce of China. The affect to capital commodities are
relatively low.
2
A model of the effect of exchange rate variability on the trade welfare
Under the assumptions that the home country’s labor supply is infinite, and the capital supply
internationally is infinite, the effect to a country’s welfare is not only including the change of the profit
of firms (producer surplus), but also including the change of labor’s welfare from employment change
ki0
when capital flow and the ratio of capital to labor is changed. This paper assumes that h =
is the
ki
ratio of domestic capital and the inflow capital, and the price of international capital price is 1 ( r = 1 ),
that means without manufacturing, the capital owners earn nothing. The labor employment of country A
：
in the commodity i exporting industry could be showed as
Li =
( a - 1)
E
rw
(1- a ) Er
)
a ( a - bQb A(a w)a
2 Ab(a w)
（8）
Form (8), we know that the occupation of country A is changed positively when E changes. The
devaluation of country A’s currency is in favor of the employment of country A. according to it, we get:
¶Li
aE ( a - 1) rw
(1- a )r
=
(a - bQb )
¶E 2 Ab(a w)a
A(a w)a
（9）
（9） means that when E increases (decreases), the employment of the commodity
i exporting
industry increases (decreases). Then according the former assumption, we simulate calculating and get
the graph 4.
The effect of exchange change to employment of
exporting industries with different capital
intensities
0
4
0
.
0
8
0
.
0
1
1
.
0
5
1
.
0
9
1
.
0
2
2
.
0
6
2
.
0
3
.
0
3
3
.
0
7
3
.
0
1
4
.
0
5
4
.
0
8
4
.
0
2
5
.
0
6
5
.
0
9
5
.
0
3
6
.
0
a(capital intensity)
755
7
6
.
0
7
.
0
4
7
.
0
8
7
.
0
2
8
.
0
5
8
.
0
9
8
.
0
3
9
.
0
6
9
.
0
：
Graph 2 The effect of exchange change to employment with different capital intensity industries8
Thus, the whole employment change of A country’s exporting industries could be expressed as the
following. Where there are M exporting industries, and
Ai , αi , Qbi denote the corresponding
parameters of commodity i exporting industry.
¶L M (1- a i )r
= ?
a ( ai
¶E i= 1 2 Ab
i (a i w)
aE ( a i - 1) rw
biQbi a i ) （10）
Ai (a i w)
It is show that when the market of country B (international) is big enough, the devaluation of country
A is in favor of the employment of country A. It is because that the exchange rate change not only
change the commodities price and exporting quantity of country A, and change the quantity of capital
inflow, which can combine the labor to produce and export, but also the rate of capital and labor in
production, thus changes the factor content of exporting commodities.
The whole welfare of exporting commodity i can be denoted as:
?
bE h
w
r (1- a ) a
[a - bQb ) ]
Ea - 1(
A(1- a )
wa
4
i
rw a - 1 1 a （11）
(1- a ) Erw(a w)- a
E (
+
[a - bQb ) ]
2 Ab
A
wa
It is showed in (24) that the exchange rate variability could change the welfare to country when
exporting commodity i to country B. The evaluation of country A’s currency go against the welfare
which is behaved in both the labor welfare and the producer’s surplus. Then the total welfare of country
墩 = (a - bQ )( bh + (1- a )rw )
4 2 Ab(a w)
¶E
- a E aw A ( b4h r (1- a ) + r (12-Aba a)w
A’s exporting commodity i to country B can be showed as:
i
a
b
a-1
1- a
a
a-1
From (12), and the assumptions, we get graph 5.
8
(1- a )
2
a
The assumption is the same as the above.
756
a
)
（12）
The effect of exchange rate change to the welfare of
country different industries of different factor
intensities
9
0 4
0
.
. 0
0 0
3
1
.
0
7
1
.
0
2
2
.
0
3 53 93 34 74 25 65 6. 56
6
2
0 . . . . . . 0 .
. .
0
0 0 0 0 0 0
0
a(capital intensity)
96
.
0
37
.
0
87
.
0
28
.
0
68 9. 59 9
.
. 0 . 9
0 0
0
：
Graph 3 The effect of exchange rate change to the welfare of country different industries of different factor
intensities 9
From the above analysis, we know that the labor intensity industry is most affected by exchange rate
variability. The evaluation of country A’s currency will both reduced the producer’s surplus and labor
welfare.
Thus the overall effect of exchange rate change to country A’s welfare could be expressed as the
following.
M
墩
= ? [( a
¶E i= 1 i
- aiE
3
a i- 1
bi Qbi )(
bi h i
(1- a i ) rw
)]
+
4
2 Ai bi (a i w)a i
w1- a i bh i a i
r 2 (1- a i ) w(1- a i ) （13）
a i- 1
(
)]
r (1- a i ) +
2 Aba i a i
a iai A 4
Conclusion
In the status of world economy imbalance, one country’s “balance sheet” traditionally determined by
trade balance has changed a lot. The capital flow, goes with the technique and management, has changed
one country’s factor endowment dramatically. The high mobile factor flow form its wealthy country to
the poor one is the marked character of the recombination and imbalance of world economy. The
country have excessive weak mobile factors, that means labors, could get the combination of high
mobile factor from abroad, and release the potential production capability, then improve both the
national and international welfare. Exchange rate variability will change the relative price of
commodities and factors internationally, which will also change the comparative cost of using different
factor endowment when production is processing, thus the ratio of different factor in the production will
9
The assumption is the same as the above.
757
change, too. It means the employment and productivity will be changed by exchange rate variability.
This paper models the country with infinite labor supply, which export quantity, export structure,
employment and welfare through export changes when exchange rate changes. The paper finds that the
evaluation of the country’s currency is not in favor of the increase of export quantity, employment and
welfare through export. And it change the trade structure of trade, that percentage of the export of
capital intensive commodities will raise, and the percentage of labor intensive commodities will fall, but
the most affected commodities appears in the labor intensive industries with certain capital combination,
such as the production of textile, garment, and shoes. And the most affected of labor employment
export industry is the most labor intense one, the affected of the country’s welfare appears in the most
labor intense industry, such as the agriculture in China. As far as China concerned, the imbalance of
world economy is augmenting the press of evaluation of REM, and the export quantity, employment and
welfare are changing. While the effects of exchange rate change to different industries are different, the
government should treat differently to industries with different factor intensities in the course.
References
[1] Anderson,S.P.,D.J.Neven: Cournot competition yeild agglomeration, International Economic Review
32,793-808
[2]Elhanan helpman:The structure of foreign trade,Journal of economic perspective,vol.1 no.2
spring,1999
[3]Gallo, Fredrik: Cournot Competition, Market Size Effects, and Agglomeration,Department of
Economics, Lund University series Working Papers with number 2005:23.
[4]Heckscher,E.F. : The Effect of Foreign Trade on the Distribution of Income. Economisk Tilastirift. In
Hechscher-Ohlin theory. Heckcher,E.F.and B.Ohlin. Cambrige, MA:The MIT Press,1991.
[5]Huamin: The spring mechanism of World Economy Imbalance and the choice of China,International
economic Rreview,2006.3-4, p45-49
[6]Jones,R.W.1965."The Structure of Simple General Equlibrium Models."Journal of Political
Economy.73:6,pp.557-72
[7]Krugman,P.R. 1995."Inrearsing Returns, Imperfect Competition and the Postive Theory of
International trade." in handbook of international Economics,vol.3.
[8]Krugman,P.R.,etc.:International economics,Beijing:Economic science publishing company,2002
[9]Ricardo J. Caballero Emmanuel Farhi Pierre-Olivier Gourinchas An Equilibrium Model of “Global
Imbalances”and Low Interest Rates NBER working paper, February, 2006
：
，
758