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Chapter 14 Export Import Effect

Chapter 14 Export Import Effect - o Recall the definition...

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Export-Import Effect o A decrease in the Canadian price level (holding the foreign  exchange rate constant) makes Canadian goods relatively cheaper than foreign  goods o This increases exports of Canadian goods and decreases imports  of foreign goods o Because exports increase, net exports increase o Because net exports increase, the quantity of Canadian goods  and services demanded at a lower Canadian price level rises Example: o Assume the nominal exchange rate is constant
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Unformatted text preview: o Recall the definition for the real exchange rate: o e = e nom * P/P F o Assume e nom is 4 euros per dollar o P = $200 o P F = 1600 euros o e is 4 * $200/1600 = 0.50 o Now assume the domestic price level falls to $150 o e is 4 * 150/1600 = 0.375 o the real exchange rate falls o this means one unit of domestic goods buys fewer units of foreign goods o so, the demand for domestic goods increases...
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