Article Review Essay Sample: The Currency Exchange Rate Between the United States and China

The article titled The Currency Exchange Rate between the US and China focuses on studying the factors that created a significant influence on the currency exchange rate between the United States (US) and China for the years between 1994 and 2010. As a way to evaluate this, it incorporates three key variables that necessitate the data collection and analysis. The dependent variable is exchange rates denoted by EXR while the independent variables include the NXR, USNOMINAL, and UE. XNR represents the ratio of the United States net exports with China to the United States Gross Domestic Product (GDP). USNOMINAL denotes the nominal interest rate of the United States while the UE represents the rate of unemployment in the United States. From the introductory paragraph of the article, it is evident that the bilateral trade relationship between the United States and China has contributed significantly to the growth of both economies. It is backed up by the fact that as of 2014, the United States was ranked as the largest economy in the world while China was ranked second. Since the two countries resumed the trade relations in 1972, the net exports have been showing an upward growth as shown in the figure below;

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From the trade relationship between the United States and China, it is worth noting that it requires the purchase as the sale of foreign currency at a price which is often referred to as the exchange rate. Since the exchange rate is dynamic, then, it is essential to determine the factors that can influence the exchange rates between the US and China as their trade relationship continues to deepen. As a way to achieve, the article utilizes a regression model that encompasses the three key variables denoted as follows;

EXR= v1 +v2 NXR+v3 UE+v4 USNOMINAL

Literature Review

The article evaluates the findings on previous studies, and there are relevant conclusions deduced from these studies. One of the significant points to note is that terms of trade and the net exports between the two countries can create a significant influence on the exchange rate. Therefore, there is a direct relationship between the net exports and the exchange rates between these countries. It is to this effect that the regression model in the article uses the net exports as one of the independent variables that influence the exchange rate.

The previous studies also reflect that there is a close relationship between the rate of unemployment and the level of international trade. In this case, it means that, as the two countries enhance trade engagement, there is a tendency that the employment opportunities will increase in both countries. This relationship thus brings the perspective that the rate of employment is a significant factor in influencing the exchange rates between these two countries. As a result, the article uses the rate of unemployment in the United States as another key independent variable in the regression model.

Lastly, the justification of the nominal rates as an element of the regression model is given in reference to the previous studies that illustrate the relationship between the real interest rate and the exchange rate.

The three independent variables are then utilized to evaluate their influence on the exchange rates as the dependent variable. In order to achieve this, the study collects data from various sources where it acquires the nominal rates of interest, the United States GDP, and the net exports between the US and China from the United States Census Bureau Statistics website. The rates of unemployment in the US are acquired from the Bureau of Labor's website. The statistical data on the nominal interest rate of China was obtained from the Agricultural Bank of China official website.

Results

After collecting the data, it was analyzed using the regression model identified above. Also, upon conducting a T-test, all the three variables were statistically significant at 5%. In this case, the findings show that there is a positive correlation between the first two independent variables which include the net exports and the US nominal rate of interest. Nonetheless, the last independent variable which is the United States unemployment exhibited a negative correlation. In the article, the study limitations were exhibited by the limited number of observations which can be handled by utilizing more years of study in the future research.

Conclusion

From the results, it is worth concluding the there exists a positive correlation between the US nominal rate of interest, the net exports between China and the United States, and the exchange rates. More importantly, it is worth noting that the fluctuation of the exchange rate can be well illustrated by the variations of the three independent variables.