Main contents of elasticity analysis method of balance of payments adjustment

Currency devaluation will cause changes in the prices of import and export commodities, and then change the quantity of import and export commodities, and finally change the trade balance. The change of trade balance ultimately depends on two factors. The first factor is the change of unit price of import and export commodities caused by depreciation; The second factor is the change in the quantity of import and export commodities caused by the unit price of import and export. Marshall-Lerner condition studies under what circumstances depreciation can lead to the improvement of trade balance. Now, let's take an example. In this example, we assume that China is our own country, the United States is a foreign country, and the RMB exchange rate depreciates from 1.7 to 1.8, and we get a set of data on the changes of the dollar unit price and export quantity of export commodities.

Elasticity Analysis of Balance of Payments Adjustment Domestic Unit Price Exchange Rate of Export Commodities US Dollar Export Commodities Unit Price Export Quantity Foreign Currency (US Dollar) Change Rate (%) Change Rate of Export Quantity (%) 071/71000010000-17.

As can be seen from the above table, in the case of 1, the RMB depreciated from 1/7 to 1/8, and the unit price of export commodities converted into US dollars correspondingly decreased from 1 US dollars to 0.875 US dollars. Due to the price drop, we assume that the export volume will increase from 10000 to 1 1000. However, the dollar income from exports did not increase, but decreased from 65,438+00,000 to 9,625. Only in the second case, when the export volume increases from10,000 to12,000, the dollar income of export increases from10,000 to10,500. This example shows that when the change rate of export quantity is less than the price change rate caused by depreciation (the elasticity of export demand is less than 1, that is, 1), the dollar income of export cannot be increased; When the change rate of export quantity is greater than the change rate of price caused by depreciation (the elasticity of export demand is greater than 1, in the second case), the dollar income of export can be increased.

Marshall-Lerner condition means that after currency devaluation, the trade balance can be improved only if the sum of the demand elasticity of export commodities and the demand elasticity of import commodities is greater than 1, that is, the necessary conditions for successful devaluation are:

em+Ex & gt； 1 In real economic life, when the exchange rate changes, the actual change of import and export depends on the degree of response of supply to price. Even under Marshall-Lerner conditions, devaluation cannot immediately improve the trade balance. On the contrary, in the first period after currency devaluation, the trade balance may deteriorate. Why does the favorable impact of depreciation on the trade balance take a period of time to show? This is because, first, trade agreements signed before devaluation must still be implemented in accordance with the original quantity and price. After devaluation, all imported goods priced in foreign currency will pay more after being converted into local currency; If the export is priced in local currency, the income converted into foreign currency will be reduced. In other words, under the trade agreement signed before the devaluation but implemented after the devaluation, the decline in export foreign currency prices cannot be offset by increasing the number of exports, nor can the increase in import prices be offset by reducing the number of imports. Therefore, the trade balance tends to deteriorate; Second, even after the devaluation of trade agreements, export growth is still affected by the cycles of understanding, decision-making, resources and production. As for imports, importers may think that the current devaluation is a prelude to further devaluation in the future, thus speeding up orders.

Figure 1-3J curve effect

In the short term, due to the above reasons, the trade balance may deteriorate first after devaluation. After a period of time, export supply (this is the main) and import demand were adjusted accordingly, and the trade balance slowly began to improve. The adjustment time of export supply is generally considered to take six months to one year. The whole process is described by a J-shaped curve, so under the Marshall-Lerner condition, the time lag effect of devaluation on the improvement of trade balance is called J-curve effect. In the J-curve effect diagram, BT2 >: At 1, which means that after depreciation, the trade balance first worsens, the deficit expands, and then improves through points C and D over time. $ TERM of trade, also known as exchange price, refers to the ratio between the unit price index of export commodities and the unit price index of import commodities, which is expressed by the formula:

I = Px / Pm

Among them, T is the terms of trade, Px is the unit price index of export commodities, and Pm is the unit price index of import commodities. The terms of trade represent the influence of price changes of real resources in a country's foreign exchange. When the terms of trade T rise, we say that the country's terms of trade have improved, which means that the country can export the same amount of goods in exchange for more imports; When the terms of trade T fall, we call the country's terms of trade worse, which means that the country can export the same amount of goods in exchange for less imports. Therefore, when the terms of trade deteriorate, real resources will be lost.

Devaluation brings about changes in relative prices. Whether to improve or worsen the terms of trade depends on the elasticity of supply and demand of import and export commodities. If:

SxSm & gtExEm, deterioration of terms of trade;

SxSm & ltExEm, improving the terms of trade;

SxSm = ExEm, the terms of trade remain unchanged;

The above conclusions are related to four hypothetical situations:

(1) When the supply elasticity tends to infinity, if the import price of this city rises, the export price will remain unchanged, if the import price is expressed in foreign currency, the export price will fall and the terms of trade will deteriorate;

(2) When the supply elasticity is infinite (equal to zero), the import price remains unchanged, the export price rises, and the terms of trade can be improved;

(3) When the elasticity of demand tends to infinity, the export price rises, the import price remains unchanged, and the terms of trade can be improved;

(4) When the elasticity of demand is infinite, the export price remains unchanged, the import price rises, and the terms of trade can be improved. It should be pointed out that the impact of the above currency depreciation on the terms of trade is the result of theoretical deduction and needs to be fully tested by empirical analysis.

In fact, the impact of currency depreciation on the terms of trade is different in different countries, and it is difficult to make a general judgment. Generally speaking, it is extremely rare to improve a country's terms of trade by devaluation, which either keeps the terms of trade unchanged or worsens them.

The criticism of elasticity theory mainly lies in that it is based on partial equilibrium analysis, which is limited to analyzing the impact of exchange rate changes on import and export markets, while ignoring the impact of exchange rate changes on total social expenditure and total income, so it has great limitations. In fact, our research shows that the above limitations of elasticity theory are related to the background of historical development. The theory of elasticity appeared in the 1930s. At that time, the macroeconomic system had not been established. Therefore, it is inevitable that elasticity theory is based on microeconomics. The main disadvantage of elasticity theory is that it does not clearly distinguish the different results that different currencies may bring, and the results often lead people astray.