Bilateral Real Exchange Rate Of RMB And Sino-Korea Trade Balance

The relationship between exchange rate and trade balance is a focus issue in international trade studies. Traditional theories consider that devaluation would improve trade balance while appreciation would worsen trade balance. American economist Magee made a deeply research on the trade balance of USA from 1971 to 1973 and proposed that in the long run, devaluation would improve the trade balance, but in the short run, devaluation would worsen the trade balance. The birth of J curve was considered as a great challenge to traditional theories, from then on, there are more and more articles which are concentrated on the relationship between exchange rate and trade balance.To relieve the pressure on RMB, in July 2005, Chinese government imposed a revolution on RMB, from then on, RMB appreciated slowly. What would RMB appreciation bring to us? This question is worth researching. To find the relationship between bilateral real exchange rate and Sino-Korea trade balance, this article employs bilateral quarterly data from 1991 to 2005, applies lots of analysis methods such as co-integration and vector error correct model in the body part.The structure of this article is arranged as follows: First, the paper introduces the concept of J curve and makes a literature review on the empirical research; second, the article enumerates some prevailed methods on the calculation of real exchange rate, and applies real exchange rate of cost on the calculation of Sino-Korea exchange rate; third, the paper employs bilateral data and makes an empirical research on the relationship between real exchange rate and Sino-Korea trade balance, according to the empirical analysis, the relationship between exchange rate and Sino-Korea trade balance is found: In the long run, there is a steady relationship between the bilateral real exchange rate and Sino-Korea trade balance, devaluation could improve Sino-Korea trade balance, but the influence is very limit; in the short run, the impact of changing bilateral real exchange rate to Sino-Korea trade balance is positive, no lag exists; moreover, in the future, the most important factor that influence the trade balance is real exchange rate, and then the income level of Korean; at last, to reprove the empirical results, this article quotes Asian financial crisis which was erupted in 1997, and the conclusion reconfirms the accuracy of the empirical results. There are two main innovative points in this article. First, in the empirical study, this article chooses quarterly data, which is better than annual data and month data; second, this paper imposes bilateral data to research the relationship between exchange rate and trade balance, which is meaningful to government policy, and these two points make the results more accurate and meaningful.