IUJ Paper Abstract: A Square Relationship between Relative Income and Price Levels among Countries
Yuichiro Yoshida (Assistant Professor, International Development Program, Graduate School of International Relations, International University of Japan, Niigata, Japan )
This paper investigates systematic linkages among "reverse imports", foreign direct investment, and exchange rates. We have in mind the competition in the @Japanese market of a Japanese multinational firm and a Chinese domestic firm. Products are @differentiated based on Japanese consumers' brand name recognition. The model shows that yen appreciation leads to an increase in Japanese FDI in China and "reverse imports", and a decrease in Japanese domestic production. Due to the barriers in brand name, the exports of the Chinese firm may fall, because the increase of reverse imports may erode the market share of Chinese firm, even though total exports from China increase. Further, we find that yen appreciation against conventional wisdom. The predictions of the model fit well with the actual figures, and shed light on the current, heated China debate.
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