The real exchange rate, sectoral allocation and development in China and East Asia: A simple exposition

Abstract Global macroeconomic imbalances are among the key issues facing policymakers, especially in the USA and China. Although there has been a great deal of debate about this important issue, there appears to have been a general failure to adequately pay attention to the role of the exchange rate in allocating resources internally between tradables and non‐tradables. These sectoral changes can have both real and macroeconomic consequences. This paper offers a simple analytical exposition of some of the issues relating to China's and East Asia's development and their impact on global imbalances using a two‐sector tradable and non‐tradables model. Copyright © 2011 John Wiley & Sons, Ltd.