Changes in Effects of Exchange Rate on Trade Balance according to Industrial Structure Change

This study investigates the impact of the real effective exchange rates on the trade balance. We also give attention to whether the effects of exchange rate on the trade market change. By using a bounds test, the results show that the impacts of the real effective exchange rate on trade balance have changed. The long-run elasticity of the real effective exchange rate has decreased, while the short-run elasticity of it has increased. The results show that, in the long-run, the real exchange rates play a less important role in the determination of the trade balance. Although economic opening of China and magnification of globalization led to excessive competition in international trade markets, Korean global companies are overcoming the effect of exchange rates through quality improvement and technology development in the long-term. Because the real exchange rate variable plays a minor role in this study, the study s policy recommendation may not support exchange rate intervention.