ABSTRACT
In an open economy, exchange rates represent the ‘overall price’ of one country’s goods, services, and assets, relative to the overall price of another country’s goods, services, and assets. The degree to which a country’s overall price is in ‘equilibrium’ provides a fundamental basis for economic policy. Determinations of exchange-rate equilibrium, and the degree to which exchange rates are out of line, enable the formulation of domestic policy as well as coordinated international adjustments. Given the globalization of economies, determinations of what equilibrium really is, or should be, also involve a complex kind of economic gamesmanship. Both international economics and politics are involved. As China’s position has gradually risen amid the world’s economies, a determination of the ‘real, equilibrium exchange-rate level’ is highly significant. A realistic determination not only benefits China, by creating an international environment that is beneficial to its own development, but it helps promote world economic development as well.
