The Mystery of Economy Structural Imbalance between China and America: A New Interpretation of Marshall-Lerner Condition

Abstract

The economic imbalances between China and America stem from the internal imbalances caused by the inappropriate macroeconomic policies of America over the past years. U.S. loose monetary policy accelerates international capital to flow to emerging market and lead to the formation of a global excess liquidity. But net capital inflows together with trade surplus makes their macroeconomic policies in emerging market countries more complicated. Long-term low interest rates lead to American increasing consumption expenditure and rising double deficit. In order to transfer the conflict, U.S. forces revaluation of RMB frequently. The continued substantial appreciation of RMB challenges the traditional Marshall-Lerner condition. Through formatting an equilibrium model, this paper deeply studies the export elasticity and import elasticity to examine the Marshall-Lerner condition and analysis its adaption and sensitivity, showing that in short term revaluation of RMB can improve U.S. trade deficit, but in long term it is ineffective.