In the Western
countries although productivity has increased, but real wages have been held
constant, including China later... Policy makers have tried to cut real
interest rate and real wages with inflation to help the Capitalist and supply,
but, that has lowered demand of the Proletariat... China's depreciation and
inflation, which it denies, to infuse exports has resulted in lower domestic
demand and also lowered demand for imports that has also lowered demand in the
trading partner’s economy... If China says that it's expansion has not stoked
inflation in the economy, it is wrong because without more money-supply and
inflation nominal exchange rate cannot depreciate... When you buy foreign
exchange or dollar you release yuan-rmb which is likely to increase inflation
and inflation expectations, therefore to increase nominal exchange rate
inflation is important, when you increase demand for dollars it also increases
it's price you release more money therefore more inflation and inflation
expectation and also to cut real wages to increase competitiveness... Inflation
though increases nominal variables but only after inflation which actually cuts
real-GDP, real interest rate, real wages and real exchange rate... which
actually reduces demand... domestic and exports... China is a blind follower of
the West and market...
In our study we have
formulated a regression equation with real-effective-exchange rate,
exports-demand, money-supply, interest-rate-spread, private-debt, public-debt,
external-debt and GPC-PCI, of the country as independent variables or
regressors and economic-growth as dependent or regressand.
The equation obtained
is as follow:
Eg =
22.605 – 0.122 REER
Sig =. (0.000) (0.000) (1)
F= 33.396 R2= 0.788
Our study shows that
the index of real-effective-exchange-rate in China has depreciated against the
basket of the Special-Drawing-Rights currencies. From 2005 to 2015, the index
has increased from 84.25 to 132, when 2010(=100). Moreover, the regression
between the economic-growth as a dependent-variable and the
real-effective-exchange-rate as independent-variable or predictor has given a
significance or P-value or Predictor-value of (= 0.000), however, the relationship
between Eg and REER is negative, and F (= 33.396), i.e. the significance of the
equation {Eg = f (REER)}, which means that the depreciation in the
real-effective-exchange-rate has contributed negatively to decrease in
domestic-consumption and the economic-growth-rate. Probably, lower real wages
have lowered the economic-growth by reducing domestic-consumption and lower
imports might also reduce wages in the trading partners’ economy and thereby
also exports of the Chinese economy to an extent. The R2 is equal to 0.788.
Moreover, the analysis shows that REER has a tolerance or multi-collinearity
with exports-demand, money-supply, interest-rate-spread, private-debt,
public-debt, external-debt and GPC-PCI, of the country.
The Fed in the US might wait for rate hikes till real-wages show firm upside due to tight labour-market and stable
inflation and inflation-expectations, when lower oil-prices due to upsurge in
Shale oil exploration and employment, would definitely help, since there is
already a gap in productivity and real-wages and demand... The share of the
working-class in the income distribution must increase to attain equality and
higher demand to offset lower labour-force-participation rate and growth... Although, the skills and productivity have
increased, there is a big gap in real wages since 1970s... Higher real wages
are good for domestic demand and would also help exports; lower prices would
increase demand... Shale is a major innovation in the US economy that would
help lower oil prices which have coincided with prior recessions... It would
increase the economy’s competitiveness and the economic-growth... Lower cost
and prices increase demand...
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