The relationship between the exchange rate and trade

by Salma,  Mengna, and Ying

Zhang, Zhou & Chen (2017) developed a model in which real exchange rate (RER) moderated the effect of import and utilization of foreign capital on export, as result of the real effective exchange rate been a hot issue since the developing of the worldwide economy.
Bahmani-Oskooee, Halicioglu & Ghodsi (2017) also stated that the impact of exchange rate changes on trade balances was tested by the use of the Marshall-Lerner condition which is based on the price elasticities of import and export demands.
Thus, the article related the trade balance of the UK based on the assumption that the impact of exchange rate on the trade balance is symmetric.
REER is real effective exchange rates of RMB from the year 2004 to 2014; WGDP is the weighted average GDP of six major import countries from Guangdong province from the year 2003 to 2013; UFC is the utilization of foreign capital of Guangdong Province from the year 2003 to 2013; REER data are collected from World Bank database.
Econometric results from Bahmani-Oskooee, Halicioglu & Ghodsi (2017) using the non-ARDL procedures revealed that there exist long-run relationships in the case of UK-Canada, UK-Germany, UK-Italy, UK-Japan, UK-Korea, and UK-US trade balance models; but no long-run relationship was found in the case of UK-Spain and UK-Norway trade balance models.
The evidence of a long-run relationship between trade balance and income and money supply variables was found but not between trade balance and real exchange rate (RER).

Zhang, Zhou & Chen (2017) focused on the effect of REER only hence, it was concluded that REER serves as a moderator of the effect of import or export by having a negative effect on the relationship between import and export so that with a higher import, the export will be lower.

Also, the indirect effect of REER on the relationship between UFC and export showed that REER and UFC have an interaction effect on export according to the regression analysis, by REER having a positive effect on the relationship between UFC and export so that with a higher UFC, export will be higher.
The policy implication that was drawn from the study of Duasa (2007) in regard to Malaysia that the difficulties in trade balance or balance of payments would better be corrected through its policies on income or growth and money supply rather than on the exchange rates regime.