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China’s Equilibrium Exchange Rate and Trade Balance: A Tale of Apples and Pirates

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Author Info
James Laurenceson ()
Kam Ki Tang () (EAERG - School of Economics, The University of Queensland)

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Abstract

China has been widely accused of deliberately maintaining an undervalued currency to fuel its exports. In this paper we argue that one of the most popular measures of equilibrium exchange rates, the Big Mac index, should make way for an Apple index; a theoretically more appealing index where purchasing power parity exchange rates are calculated based on the prices of globally available Apple Inc. products such as the iMac and iPod. Our Apple index also embodies a technique that can account for the value share of non-tradeable inputs, a bias that has plagued the Big Mac index. In contrast to the Big Mac index, the Apple index concludes that the RMB is not undervalued. An alternative explanation for the rapid growth in China’s exports is offered and we note that after accounting for intellectual property right (IPR) piracy, there is nothing in China’s overall trade balance to suggest an undervalued exchange rate. Piracy means that China may well be unfairly benefiting from trade, but the salient policy implication is better IPR enforcement, not distorting the exchange rate in a bid to compensate.

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Paper provided by School of Economics, University of Queensland, Australia in its series EAERG Discussion Paper Series with number 0805.

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Handle: RePEc:qld:uqeaer:08

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  1. Eswar Prasad & Shang-Jin Wei, 2005. "The Chinese Approach to Capital Inflows: Patterns and Possible Explanations," NBER Working Papers 11306, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  2. DavidC. Parsley & Shang-Jin Wei, 2007. "A Prism into the PPP Puzzles: The Micro-Foundations of Big Mac Real Exchange Rates," Economic Journal, Royal Economic Society, vol. 117(523), pages 1336-1356, October. [Downloadable!] (restricted)
    Other versions:
  3. Chou, W. L. & Shih, Y. C., 1998. "The Equilibrium Exchange Rate of the Chinese Renminbi," Journal of Comparative Economics, Elsevier, vol. 26(1), pages 165-174, March. [Downloadable!] (restricted)
  4. Jeffrey Frankel, 2005. "On the Renminbi: The Choice between Adjustment under a Fixed Exchange Rate and Adjustment under a Flexible Rate," NBER Working Papers 11274, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Eichengreen, Barry, 2004. "Chinese Currency Controversies," CEPR Discussion Papers 4375, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  6. Ong, Li Lian, 1997. "Burgernomics: the economics of the Big Mac standard," Journal of International Money and Finance, Elsevier, vol. 16(6), pages 865-878, December. [Downloadable!] (restricted)
  7. Michael R. Pakko & Patricia S. Pollard, 2003. "Burgernomics: a big MacT guide to purchasing power parity," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 9-28. [Downloadable!]
  8. YANG, Jiawen, 2004. "Nontradables and the valuation of RMB--An evaluation of the Big Mac index," China Economic Review, Elsevier, vol. 15(3), pages 353-359. [Downloadable!] (restricted)
  9. Xiaolan Fu & V. N. Balasubramanyam, 2005. "Exports, Foreign Direct Investment and Employment: The Case of China," The World Economy, Blackwell Publishing, vol. 28(4), pages 607-625, 04. [Downloadable!] (restricted)
  10. Michael Funke & Jörg Rahn, 2005. "Just how Undervalued is the Chinese Renminbi," Quantitative Macroeconomics Working Papers 20504, Hamburg University, Department of Economics. [Downloadable!]
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This page was last updated on 2008-11-16.

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