Currency: What is Exchange Rate?

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Exchange rate represents the external value of a currency. Changes in exchange rates may affect the relative position of a country in the international trade. Politicians and economists concern about exchange rate variability for lots of reasons, among which that the exchange rate variability discourages trade comes first. However, a large empirical literature on this issue does not confirm a significant effect of exchange rate on the volume of trade [1]. Instead other variables such as employment should be much more important from a practical point of view, for it is closely related to people’s livelihood. With China's deepening Opening Up and economic restructure adjustment and the continuous appreciation of RMB in recent years, the issue of RMB exchange rate becomes the focus of attention inside and outside the country. However, affected by the financial crisis, China's real economic growth slows down, and businesses are facing difficulties in corporate operations, and the domestic employment situation is even grimmer. Besides, there are findings that with the appreciation of the US dollar from the 1970s to 1990s, many industries were losing jobs. Therefore, studying the impact of the RMB exchange rate changes on employment has important practical significance. 1.2 Review of domestic and foreign researches 1.2.1 Review of theoretical studies A number of studies have attempted to measure the effects of exchange rate fluctuations on domestic employment adjustment at home and abroad. Theoretical studies analyze mainly from the mechanisms and pathways that exchange rate changes affecting labor demand. Simon and Michael (1998) argue that both the elasticity of employment to exchange rate and the speed of adjustment to exchange rat... ... middle of paper ... ...ially in construction and at the aggregate level. If the real exchange rate of dollar appreciates by 1% unexpectedly, the aggregate employment will decrease by 0.09% (significant at 10%) and the employment rate in the construction sector will decrease by 0.34%, which is significant at 5%. [6] Klein and Triest (2003) use the data of American manufacturing sector from 1973 to 1993 and analyze empirically, finding that exchange rate changes reallocate workforce. In direct quotation, the real exchange rate depreciation contributes to job destruction. Further study shows that trend real exchange rate changes significantly affect the labor force reallocation rather than net employment level, while cyclical real exchange rate changes affect net employment only by job destruction. And they expect the impacts to be larger with the industries gradually to be more open [7].

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