Researches On The Relation Between Terms Of Trade And Business Cycle In China

The course of economic development in most developed and developing countries indicate foreign trade plays an important role in their economic development: it hastens the capital accumulation and accelerates industrialization. Since 20th century, with the trade liberalization and economic globalization, international trade expands fast, many countries'development more and more relies on international trade. Since the reform and open policy, China's foreign trade in the scale, the structure of trade commodity, trade system, and other aspects have undergone profound changes. These changes of foreign trade lead China's economy to grow rapidly and continuously.In the traditional theory of international trade, the terms of trade are considered as an important indicator to measure the gains from trade, the improvement and deterioration in the terms of trade will impact each country's trade gains. If the terms of trade improve, the country's interests in international trade will be in a favorable position. On the contrary, if the terms of trade deteriorate, the country will be in disadvantaged. Therefore the study of the terms of trade has great practical significance. In view of this, from the macroeconomic point, base on the econometric models and methods, the paper analyzes the relationship between China's business cycle and the terms of trade shocks, and their mutual influence. The paper expects to find some facts and law that are favorable to China's economic development, and puts forward some recommendations which are conducive to the economic development, especially foreign trade.In this paper, chapter I begins with a brief introduction of the terms of trade and the business cycle, and then briefly summarized the theory of business cycle, as well as the classical theory about international trade and economic growth. There are four forms about terms of trade, that is, NBTT (Net Barter Terms of Trade), ITT (Income Terms of Trade),SFTT(Single -Factor Terms of Trade), DFTT(Double-factor Terms of Trade). NBTT is the most basic form of terms of trade, which is defined as the relative price of exports goods to imports goods. In the final, base on analysis on the home and abroad literature of terms of trade, the paper summarizes the established of terms of trade, the theory of terms-of-trade deterioration and the research's results about the relationship between economic growth and terms of trade as well as the status quo of China's terms of trade study.Chapter II, first there is a review about the course of China's foreign trade reform, it can be divided into three stages: 1979-1987, the exploratory phase; 1988-1993 the adjustment phase; since the 1994 the improvement phase. The second is the descriptions of China's NBTT and ITT from 1981 to 2006, and the analysis on the factors affecting the changes of NBTT and ITT. The changes of China's NBTT can be divided into two stages: the first stage: 1981-1985, this phase, NBTT tilted upward, from 157.3 in 1981 rose to 173.4 in 1985, increased by 10.2%; second phase: 1986-2006, NBTT showed a downward trend, especially since 1997, there was a marked decline, the terms of trade index from119.3 in 1997 fell to 91.1 in 2005, a decrease of 28.2%. However, due to the increase in export volume much higher than the decline in the NBTT, China's ITT was obvious upward trend. China's imports commodity prices rise, export commodity prices fall, and structural changes in import and export, multinational corporations'transfer pricing and export enterprises'vicious competition directly lead to the deteriorate of China's NBTT. The ITT improvement or increase of the export volume is mainly due to the processing trade and export policy.Chapter III, first analyzing the impact of terms of trade movements on major economic indicators. The deterioration in the terms of trade shows that compared to the import, the purchasing power of exports decreases, which lead the real income decreased, due to the rate of reduced consumption less than the rate of reduced income, which causes the decline of savings, investment and output. Then in accordance with the fluctuation in China's economic growth rate since 1981, the business cycle can be divided into four stages .At the fourth stage the economic cycle fluctuations found in a large benign deformation, the climb phase is greatly extended, the economy is developing steadily, continuously in high position. Section III in accordance with the business cycle, analyzing the relationship between the terms of trade and the business cycle, come to the conclusion that the trend in the terms of trade and GDP is similar, the time difference correlation analysis shows that relative to the GDP growth rate, terms-of-trade growth rate is antecedent.Chapter IV the empirical part of this paper. A VAR model with four variables: GDP, the money indicator M0, savings and terms of trade is this paper's empirical model, the lag period is 3. The empirical analysis of impulse response function and variance decomposition showed the shock of NBTT will have a long-term positive impact on the growth of GDP, M0 and save. According to the chapter III, the terms-of-trade improvement indicates that compare to import, China's export purchasing power will enhance, as a result, real income, savings and investment will increase. If other conditions being same, the increase of investment will lead output increase, which will accelerate the speed of economic development, so the terms of trade will have positive impact on the growth of GDP growth and savings. In addition, a country whose import capacity gets stronger will attract more foreign capital, and this is also conducive to enhancing the economic growth. Variance decomposition indicates that the GDP growth rate fluctuation is affect by the growth rate of M0 and save and the changes of NBTT, in addition to itself. NBTT's interpretation ability to economic growth's fluctuations is about 6.6%, greater than the impact of M0. Because the impact is on the GDP growth rate, so that the impact can not be ignored.Chapter V, the theoretical and empirical analysis finds that the terms of trade played a role in the business cycle. But China's foreign trade system is not sound, the structure of export commodities also is unreasonable, and the proportion of processing trade in the entire foreign trade is excessive. So finally the paper gives some favorable proposals to improve the conditions of China's foreign trade and the terms of trade, including speeding up the upgrade of the industrial structure, enhancing export commodities'international competitiveness, strengthening macroeconomic regulation and control, and improving the trading system. Especially after joining the WTO, more attention should be paid on the trade's environment and conservation issues.