1, the impact of price changes of traded commodities caused by exchange rate changes on trade balance.
Exchange rate changes can affect import and export and trade balance by causing changes in the relative prices of commodities in domestic and international markets. When the Marshall-Lerner condition is established, the devaluation of local currency can reduce the relative price of domestic products and increase the relative price of foreign products, thus enhancing the price competitiveness of export commodities and increasing the price of imported commodities, which is conducive to expanding export volume, restricting imports and promoting the improvement of trade balance. However, the price transmission and competitive effect of trade balance on exchange rate changes are influenced by two factors. On the one hand, it is influenced by whether there is a time lag between exchange rate changes and import and export commodity price adjustments and the length of the time lag. In the international market, the price changes of financial assets guided by exchange rate changes can be completed in an instant, while the import and export prices guided by exchange rate changes are relatively slow, so the depreciation of local currency may lead to the deterioration of domestic trade balance first and then gradually improve, and there is a J-curve effect. On the other hand, it is influenced by the change degree of import and export commodity prices caused by exchange rate changes. At present, most international markets are not completely competitive, and most goods are not homogeneous products. In this case, the change of import and export prices is not necessarily equal to the change of exchange rate. Because import and export are relative, exchange rate conduction is defined as the range of price changes caused by exchange rate changes. However, because exporters have certain rights to determine prices and output, the change of commodity prices will inevitably lead to the change of demand elasticity, so the depreciation of domestic currency does not necessarily lead to the increase of imported commodity prices in the same proportion. Generally, the price increase of imported goods is less than the exchange rate depreciation, which is an incomplete exchange rate transmission.
2. The impact of income changes caused by exchange rate changes on the trade balance.
Exchange rate changes can affect the trade balance by affecting national income. There are two main aspects: on the one hand, if there are underutilized resources in the depreciating country, devaluation can stimulate the demand of domestic and foreign residents for this product. This expenditure conversion effect of depreciation will improve the independent trade balance, and the improvement of the independent trade balance will increase a country's national income through the Keynesian multiplier. The increase of national income will correspondingly increase domestic expenditure. If the improvement of independent trade balance brought by devaluation exceeds the increase of import brought by the increase of national income, that is, the Robinson-Metzler condition is met, the main impact of currency devaluation is still to improve trade balance. On the other hand, depreciation usually leads to an increase in the prices of imported goods and a decrease in the prices of exported goods, thus leading to a deterioration in the terms of trade. If the proportion of national income used for imports is high, the terms of trade have a considerable impact on expenditure. After the devaluation of the domestic currency, under the same nominal income level, consumers can only buy fewer goods (including domestic goods and foreign goods), resulting in a decline in real income. This will inevitably lead to a decline in the expenditure of devalued countries, thus improving the trade balance.
3. The impact of price level changes caused by exchange rate changes on the trade balance.
Exchange rate changes not only affect the prices of traded products, but also affect the overall price level of the country, thus affecting the trade balance. After the devaluation of the currency, it mainly affects the domestic price level through three channels. First of all, devaluation makes the price of imported goods expressed in local currency rise. On the one hand, the rising price of imported local currency directly affects the prices of imported raw materials and semi-finished products, which in turn increases the cost of domestic goods, such as the current energy price; On the other hand, due to the rising price of imported consumer goods, it will inevitably push up domestic wages and indirectly affect the cost of domestic goods. These two aspects have led to the rise of domestic price level. Secondly, if devaluation promotes the improvement of trade balance in a short time, it will cause the export demand of devalued countries to increase, thus increasing the total demand. Under the condition of full employment, when exports exceed imports, it means that the national total income level is greater than the products and services that supply domestic demand. Under this condition, excessive export will lead to insufficient supply of domestic products and lead to inflation. Under the condition of shortage economy, this situation will be more serious. On the contrary, when domestic demand is insufficient, export will ease the pressure of deflation and promote economic development. If a country does not achieve full employment, economic growth will only improve the utilization rate of resources and get closer to full employment. Thirdly, if there is a trade surplus after depreciation, foreign exchange reserves will increase. The increase in foreign exchange reserves will increase the base currency invested by the central bank through the purchase of foreign exchange. In fact, when international reserves increase, it is likely to lead to an increase in domestic prices. The rise in domestic prices has an impact on the trade balance in two ways. First of all, under the condition of constant nominal money supply, the actual cash balance held by the public decreases due to rising prices. In order to restore the actual cash balance to the level that people are willing to hold, on the one hand, the public will sell securities, which will increase the market interest rate and reduce investment; On the one hand, it will reduce consumption expenditure, on the other hand, the total domestic expenditure will decline. This will inevitably affect the change of trade balance. Second, the increase in domestic prices exceeds the depreciation of the nominal exchange rate of the local currency. At the same time, assuming that the foreign price level remains unchanged, nominal devaluation will not cause the real devaluation of the currency, but will lead to the rise of the real exchange rate and eventually worsen the trade balance.
4. The impact of expenditure changes caused by exchange rate changes on the trade balance.
Exchange rate changes can affect the trade balance by affecting expenditure changes. There are two forms of expenditure change, one is expenditure transfer representing structural change, and the other is expenditure change representing quantitative change. The influence of exchange rate changes on trade balance is realized through expenditure transfer and expenditure changes. Changes in exchange rates will cause changes in the relative prices of commodities between the two countries. When the local currency depreciates, the foreign currency price of domestic exports will fall, while the local currency price of domestic imports will rise, so domestic products are cheaper than foreign goods. This devaluation will shift domestic and foreign expenditures from foreign commodities to domestic commodities. Whether the expenditure transfer can be realized and the effect is remarkable depends on the elasticity of supply and demand of domestic and foreign commodities. When the elasticity of supply and demand is large, the trade balance can be changed by affecting the expenditure transfer after exchange rate changes. The influence of exchange rate changes on trade balance is realized not only by affecting the transfer of expenditure, but also by changing the scale of expenditure. When the local currency depreciates, domestic exports increase, imports decrease and trade balance improves. However, with the increase of domestic exports, national income will increase, which will expand the scale of domestic expenditure, which will lead to the increase of imports and reduce the improvement of trade balance. This is the principle that exchange rate changes affect the trade balance through changes in expenditure. If the backflow effect is considered, after the devaluation of the local currency, the national income will increase and the scale of domestic expenditure will expand, thus increasing the income of foreign nationals, increasing the demand for domestic products and expanding the export of domestic products. Therefore, the impact of exchange rate changes on trade balance is more complicated.