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Abstract

In this paper we investigate the dynamic relationships among international trade, foreign direct investment and the real exchange rate of China. The analysis is based on a vector auto-regression (VAR) model using historical data. The empirical result approves the reciprocal cause-and-effect relationships among the three variables in consideration of the long term. Recently, the trade surplus and FDI are important source of the pressure of RMB appreciation, RMB appreciation will not make China's trade balance worse in a certain period of time, but it will have a negative effect on FDI inflows.We suggest that, in terms of exports, China should export more technology intensive and capital intensive products, and the export products should also be more diversified; In terms of exchange rate,China should continue to carry on the reform of exchange rate along the original independent, controlled and gradual principles,and realize the internationalization of RMB. Thus it can not only can effectively attract more foreign investment, but also promote the development of Chinese economy.

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