Trade War and the Balanced Trade-Monetary Theory

Abstract

One of the longest-lasting controversies in the international macroeconomic literature is the purchasing power parity theory. It is the most controversial subject that has been tested with various econometric models in different timeframes and geographic data sets. It is a common assumption used regarding the exchange rate and the validity of the Law of One Price. The present article aimed to present a new model to estimate the fair value of exchange rate which is one of the most critical factors in trade balance among countries, based on balanced trade-monetary theory by assessing the under or over-valuation of currencies. We can assume that a country with a strong economy should have strong money and vice versa. The results showed undervaluation of the dollar versus Yuan, Pound and Yen by 1.41, 1.149, and 1.126 times, respectively in 2018. Therefore, among the U.K., China, and Japan, Japan and the U.K. had a better trade balance with the U.S. than China

Keywords

• gdp per-capita
• balanced trade ratio
• balanced trade-monetary theory
• purchasing power parity (ppp)
• consumer price index (cpi)