This leads us to make a distinction between the direct and indirect effects of FDI on the current account balance: direct effects determine the investment account balance, while indirect effects influence the current account balance by shaping the trade balance (Mencinger, 2008).
The factors underlying the relationship between trade balance and FDI need then to be examined in the developing and transition countries of Asia (called thereafter "developing Asia"), one of the most dynamic area in these regards.
This paper is theoretical in nature and specifically a review article on the determinants effect of exchange rate movement on the trade balance. It provides a survey of the alternative theories that focus on the effect of exchange rate changes on the trade balance.
The Determinants Effect of Exchange Rate on Trade Balance: The Reviews and Approaches
Thus, under the case of a consumer surplus maximizing antitrust authority, the additional producer gains reaped by home producers in postmerger international markets, which might be particularly high under positive trade balances, would enhance the incentive for merging firms to increase their lobbying efforts in order to secure antitrust approval (Clougherty, 2002).
Testing the two competing propositions requires a measure of trade balance to examine whether greater trade balances lead to more strict or more lenient merger policy for an industrial sector.
To cut to the conclusion, our results indicate that the effect of the budget balance on the trade balance, if any, is modest.
However, the dynamic nature of this relationship and the adjustment of the trade balance to shocks in the budget surplus remains unspecified.
Do devaluations affect real magnitudes, in particular the trade balance? A devaluation may effect the trade balance through two channels: devaluation of the real exchange rate and a direct effect on domestic absorption.
The controversy over the effects of devaluation on the trade balance arises because according to Frenkel and Johnson [1976, 42] "the monetary approach rejects the emphasis given to the role of relative prices in the analysis of devaluation." Global monetarists argue that neither of the links in the chain postulated by the traditional approach is likely to hold in practice (see Laffer ).
While the critiques of the GL index are based on a presumed distortion in the measurement of the phenomena, which would only affect the aggregate version of the indicator, the inadequacy of the normalized trade balances
as detectors of specialization is also found at the disaggregated level.
The next section contains a selective review of the empirical studies that have examined the sensitivity of China's trade balance
to movements in the real effective exchange rate of the renminbi.