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Study on the Relationship Between Foreign Trade Imbalance and Capital Formation
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TitleStudy on the Relationship Between Foreign Trade Imbalance and Capital Formation  
AuthorGao Qian, He Rong and Zhu Qibing  
OrganizationChina Minzu Securities;Beijing Foreign Studies University; 
Key WordsTrade Imbalance; Capital Formation; Real Disposable Income; Trade Surplus; Capital Stock. 
AbstractIn this paper, theoretical models were set up to analyze the impact of trade surplus or trade deficit on capital formation. In the analysis, a formal derivation was made using national economic accounting identities to demonstrate the relationship between trade balance and capital formation. We also introduced mandatory exchange settlement to Tobin’s real disposable income formula, and based on that we constructed a capital stock growth model with the consideration of trade imbalance. An imperial study has been done using simultaneous equations model, in which 15 mid-income economies were included and an extended analysis was made based on the actual condition of china. We found out that in traditional theories, trade deficit would increase capital formation and vice versa, but the mandatory exchange settlement policy could change the relationship between them, thus improving the capital formation path. The findings of the imperial study on mid-income economies and China were also broadly in line with this conclusion. This conclusion indicates that we need to switch our policy focus to trade balance and improve the condition of capital formation by increasing imports. 
Serial NumberWP896 
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