China is the world s largest exporter and has a fixed
China is the world’s largest exporter and has a fixed nominal exchange to the U.S. dollar. However, China’s real exchange rate, which determines the country’s competitiveness, can change even when the nominal rate is fixed. Plot since 1993 the nominal exchange rate of Yuan per dollar (FRED code: EXCHUS). When did China begin to allow its currency to appreciate on a sustained basis? Add to the graph the real exchange rate (see equation 2 in Chapter 10) by adjusting the Yuan-dollar exchange rate for relative consumer price changes in China (FRED code: CHNCPIALLMINMEI) and the United States (FRED code: CPIAUCSL). (Hint: Divide the U.S. price index by 1.95 to set a common base year of 2005=100 for both price indexes used in the real exchange rate formula,) How has China’s real exchange rate evolved recently? What impact should these changes have on China’s exports?

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