Income Distribution And Real Exchange Rate

China’s economy is undergoing a period of transformation.The goal of common prosperity requires a reasonable balance between development and people’s livelihood.Income distribution and real exchange rate are the two key internal and external factors that China needs to consider at the current stage.At present,China is already the world’s largest exporter and the world’s second largest importer.Foreign trade has become an important driving force for China’s economic development and an important means for China to promote modernization and achieve common prosperity.As China’s main trading partner,the increasingly tense economic relations between China and the United States and the intensifying trade war between China and the United States not only affect the amount of trade between China and the United States,but also have a profound impact on the global trade pattern.In addition,the continued rampancy and repetition of the new management epidemic in the world have dealt a heavy blow to the production and economic situation of major economies in the world.How to effectively deal with the impact of exchange rate changes on China’s economic development is one of the key topics to be studied at this stage.Firstly,based on the review of relevant literature at home and abroad,this paper theoretically analyzes how income distribution affects the real exchange rate through the rate of return on capital,and puts forward relevant assumptions.First,in the capital biased income distribution model,driven by capital concentration and capital biased technological progress,enterprises increase the investment proportion of capital factors,which leads to the reduction of the relative price of capital factors and finally the improvement of capital productivity.Second,from the perspective of capital flow,the difference in the rate of return on capital between departments caused by the income distribution model biased towards capital is the deep-seated reason for the change of real exchange rate.Third,the high return on capital market formed by the income distribution gap will attract the continuous inflow of foreign capital,and then affect the real exchange rate.Secondly,this paper selects the panel data of 28 countries from 1995 to 2018,takes income distribution and return on capital as the core explanatory variables,and introduces the interactive term for empirical analysis.Firstly,this paper verifies the relationship between income distribution and return on capital;Second,the empirical model is regressed with fixed effect,and the endogeneity between income distribution and real exchange rate is treated with two-stage least square method;Thirdly,the interaction term between return on capital and income distribution is added to the model to test whether the interaction term can affect the main effect of income distribution on the real exchange rate.Based on the above regression,this paper draws relevant conclusions.First,the change of labor income distribution proportion will lead to the change of return on capital,and the combined effect of the change of labor income share and return on capital will have an impact on the real exchange rate.Second,the labor income share has a negative correlation with the return on capital,that is,the increase of labor income share will inhibit the return on capital and cause the decline of the return on capital.The impact of the change of income distribution share on the return on capital will affect the actual exchange rate by acting on the two sectors.Finally,this paper attempts to give relevant suggestions: first,optimize the proportion of income distribution and stabilize the income gap.Keeping the amount of income distribution at an appropriate level can maintain social stability and increase social welfare on the basis of the stable improvement of the rate of return on capital.Second,create a policy environment to encourage consumption and improve marginal propensity to consume.The establishment of the economic structure of the "wage driven" aggregate demand mechanism improves the overall return on capital in the market,and then improves the investment environment,so as to attract the continuous inflow of foreign capital.Third,make rational use of foreign capital and optimize the industrial structure.Properly introduce foreign advanced enterprises to bring new vitality to the market,so as to promote the high-quality development of China’s economy.