Measures of International Relative Prices for China and the USA

22 Pages Posted: 13 Oct 2009

See all articles by Charles P. Thomas

Charles P. Thomas

Thomas & Son Analytics

Jaime Marquez

Board of Governors of the Federal Reserve System - International Financial Transactions Section

Sean Fahle

SUNY Buffalo, Department of Economics

Abstract

In this paper we assemble a measure of international relative prices to gauge the average amount by which prices in China and the USA differ from the prices of their trading partners. Our estimated weighted average of relative prices for China and the USA are the first to use the significantly revised purchasing power parities embodied in the price data from the World Bank's World Development Indicators. Our analysis reveals several findings of interest. First, interactions between the structure of trade and the levels of relative prices are sufficiently important to induce divergences between the weighted average of relative prices and conventional real effective exchange-rate indexes. Second, revisions embodied in World Development Indicators price data generally lower the estimate of US international relative prices. Third, net exports are inversely related to the estimate of US international relative price, but, for China, the correlation is positive. Estimating this correlation for other countries reveals no systematic pattern related to the level of development alone. Fourth, unlike previous work, using our price measures we find that an increase in US prices relative to Chinese prices raises the share of China's exports to the USA. Finally, there is a distinct possibility of eliminating the long-standing differential in income elasticities of US trade in empirical applications.

Suggested Citation

Thomas, Charles P. and Marquez, Jaime and Fahle, Sean, Measures of International Relative Prices for China and the USA. Pacific Economic Review, Vol. 14, Issue 3, pp. 376-397, August 2009. Available at SSRN: https://ssrn.com/abstract=1487821 or http://dx.doi.org/10.1111/j.1468-0106.2009.00456.x

Charles P. Thomas (Contact Author)

Thomas & Son Analytics ( email )

5409 Center St
Chevy Chase, MD 20815
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2022075834 (Phone)

Jaime Marquez

Board of Governors of the Federal Reserve System - International Financial Transactions Section ( email )

20th and C Streets, NW
Washington, DC 20551
United States

Sean Fahle

SUNY Buffalo, Department of Economics ( email )

415 Fronczak Hall
Buffalo, NY 14260
United States

HOME PAGE: http://economics.buffalo.edu/facultyprofiles/sean-fahle/

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