EXCHANGE RATE DETERMINANTS OF THE US DOLLAR AND CHINESE RMB: A CLASSICAL POLITICAL ECONOMICS APPROACH

Abstract

This paper contributes to the literature on determining the real exchange rates by developing a model that is based on key propositions of the classical political economy within which the real competition governs domestic and international trade, the labor theory of value is underneath domestic and international prices and, under these conditions, the principle of absolute cost advantage shapes international trade. The econometric analysis shows that the relative real unit labor cost is a key regulator of the long-run behavior of real exchange rates in both, China and the United States of America (USA), for the period 1982-2018.