A Study On The Evolution Characteristics Of International Relative Price

Economies which experience higher economic growth are always faced with dual pressures of currency appreciation and inflation. Nowadays, these two pressures faced by China are growing more and more. With the rapid growth over the past30years, China has become the second largest economy in the world and has become the middle-income level country. With the environment and resources constraints increasing and the factor endowments change such as labor resource getting scarcity, the growth potentiality of China’s traditional growth pattern drived mainly by export and investment are going down quickly. In this case, China needs to change its economic structure and growth pattern. For the respect of exchange rate, China needs to implement more flexible exchange rate policy in order to realize optimized resources allocation and economy growth. Meanwhile, RMB exchange rate is correlated with inflation. If Balassa-Samuelson effect also suits China, it means that China will inevitblly experience higher inflation while China’s economy experience higher growth. Since cross-countries relative price derives from price level and nominal exchange rate, the relative price theoty is then the implied prerequisites of other sophiscated theories of international economics, at least as a long-run relationship. Because relative price theoty focuses on the long-run determinant mechanism of real exchange rate which implying the ideology of long-run equilibrium exchange rate, so it is the fundamental theory of long-run equilibrium exchange rate behaviour and it can provide fundamental guidance for an economy’s exchange rate adjustment route.Any theory has its application environments and prerequisites. Relative prce theory is also unexceptional. The significant change of global relative prce system after world war two and the correspongding defferences of explanation bility of some specific relative price theores have proved this point. As a stylized fact for present cross-countries price level, Penn effect (Balassa-Samuelson effect) indicates that richer countries habe higher price levels than poorer countries. But "long-run cross-country prce data exhibit a puzzle"(Bergin, Glick&Taylor,2004) raises a challenge to Penn effect. The history data indicates that the Penn effect which seen as conventioanal stylized fact only appears gradually since1980’s. But looking back fifty years, or more, this effect virtually disappears from the data. Obviously, how to explain this phenomenon is an important project for international relative prce research.This dissertation employs Penn World Table7.0as the main data resources, undertaking a systematic study on the evolution characteristics of international relative prces after world war two. The main work and conclusion are as follows:Firstly, this dissertation summarizes international relative price theores. We analyze the causes of price defference for tradable goods in case of closed economy from the angles of demands and supply by employing new classical equilibrium pattern, especially we discuss Heckscher-Ohlin model which expains the prce defference from the angle of factor endowments. By emplying partial equilibrium analysis and general equilibrium analysis, we discuss the price convergence for tradble goods in case of open economy. The theories of nontradble goods price and the whole price level determinant mechanism includes productivity defference hyposysis, factor endowments defference hyposysis and economic structure defference hyposysis.Secondly, we analyze the relative price convergence in the scope of world and find that the whole world economies and defferent income-level economies all experience "sigma" convergence since world war two. The results indicate that price defference among economies tent to decrease. The regression equations between relative price development speed and the original price level indicates that whether for the whole world or for each group, there exist significant "beta" price convergence since world war two. Based on the developing practice of world economy, we make a conclusion that the price convergence mainly caused by the progress of economic globalization. The other characterises of relative price evolution include:the developed economies’whole relative price level and average relative per capita GDP both rise after world war two, while the less-developed economies experience price level declining and stable relative per capita GDP. The results indicate that the Balassa-Samuelson effect probably holds for developed countries but not holds for less-developed countries.Thirdly, we investigate the characteristics of relative price evolution for countries experience higher economic growth. We perform OLS regressions between relative price and relative per capita GDP for103economies for defferent years after world war two. We find that before1980’s, Penn effect doesn’t hold but appears after1980’s. We perform time series data cointegration test and Granger causality test for developed countries with higher growth rate. The results indicate that BS effect is a universal fact for developed economies, what’s more, most developed economies exist Granger causality from per capita GDP to relative prce. The descriptive analysis for less-deveolped open economies with higher growth rate indicates that BS effect is also suitable for these economies. The investigation of relative price evolution routes for developed economies with higher growth rate performed by us indicates that the prce evolution routes are various within which the nominal exchange rate adjustment routes are quite defferent, while domestic prices tend to increase commonly.Fourthly, we investigate the relative price evolution characteristics of China since1978. We find that the relative price change conversely from relative per capita GDP before1994and after that they both go up. We compare the deflators of secondary industry and tertiary industry and find that the tertiary industry price level experience higher increase than secondary industry which fits BS effects. Then we perform Granger causality test between the data of GDP deflator defference between China and United States and the data of defference between China’per capita GDP growth rate and United States’per capita GDP growth rate. The result indicates that there exist Granger causality form growth rate defference to deflator defference. Based on BS effect, we propose some suggestions for exchange rate policy and price policy. Under the constraint of relative price going up more quickly, China needs to coordinate exchange rate policy and price policy. Because RMB has experienced significant appreciation since2005, in order to realize successful and smooth industry promotion, China needs to keep RMB’exchange rate stable. We suggest that in the near future, before labor supply become scarity, China can adjust inflation rate aim a little higher, pushing ahead price reform, harmoning relations between all parts of price system in order to leave more policy space when dual economy turning point occur. In the far future, China will probably face greater inflation. In this case, policy makers need to corporate the application of exchange rate policy and price policy. Meanwhile, when labor factor become scartity and employment situation become easy, China can slow down its growth rate to an appropriate level in order to keep the conomy in equilibrium.The innovation of this paper lies in the following two aspects:First, the paper anlaysis relative price σ and β convergence characteristics for all economies and defferent economic group which reveals the stage characteristics of Penn effect.The result expand the comprehensive understanding of Penn effect especially its environment and prerequisites. The research remedies the deficiency of domestic research. Secondly, the paper widely proves BS effect for high growth devevoped economies by the method of cointegration, indicating that BS effect is the common characteristics for high growth open economies.The deficiency of this paper mainly lies in the following four points:First, the paper only investigates the BS effect for less-developed open economies by descriptive methods while not performing empirical test. Secondly, the data used in this paper is mainly from Penn World Table. Dtata resourse has limitation. Thirdly, this paper only investigates the common characteristics of relative price evolution for high growth economies while not investigating their individual characteristics. Fourthly, the paper focuses on the relative price evolution characteristics of high growth economies while not investigating other economy’s characteristics.