A decrease in the nominal exchange rate creates favorable conditions for export . An increase in the nominal exchange rate is favorable for imports .
NX = NX ( )
These net exports are a function of the real exchange rate
Real exchange rate
NX
NX ( )
If the real exchange rate is much lower , national goods will be cheaper compared to imported goods and net exports will increase .
The amount of net exports can be less than zero , because the volume of imports can exceed exports .
0
Real exchange rate factors
BALANCE
Current account balance of payments NX( )
the higher it is , the lower NX is
BALANCE
Accounting for capital movements
(S-I)
The greater the ratio S > I , the more soums can be exchanged for dollars for investment abroad.
= -
NX
NX ( )
SI
The real exchange rate reaches the equilibrium level at the intersection of the S-I curve and the net export curve . At this point , the supply of the national currency for capital operations is equal to the demand for the national currency for current operations .
Fiscal to real exchange rate impact of politics
NX
NX ( )
S 2 -I
S 1 -I
NX 2
NX 1
2
1
NX
NX ( )
S 2 -I
S 1 -I
NX 2
NX 1
2
1
Domestic fiscal policy .
An increase in the tax burden and government spending in one's own country leads to a decrease in the amount of savings and S-I . This shifts the SI curve to the left and increases the real exchange rate, reducing net exports by NX .
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