As seen in class us net exports nx can display a negative...

As seen in class, U.S. net exports (NX) can display a negative value. Suppose the Euro Area (European countries using the Euro as currency) and China were the only two trading partners of the U.S. Consider the following scenario: the USD appreciates (gets stronger) with respect to the Euro, but depreciates (gets weaker) with respect to the Chinese Yuan. Which of the following statements is correct? (a) NX will surely increase (b) NX will surely decline (c) NX will surely remain unchanged (d) It is hard to tell what will happen to NX since it will depend on the relative magnitude of trade with Europe compared to China

Transcript

00:01 So here we're talking about exchange rates, and we're told that the nominal rate, the nominal exchange rate, which we usually just call e, is going to go from 82 yen per dollar, is going to go to 72 yen per dollar.

00:22 Now, this is all great and well, but we should think about what this means.

00:27 How would you describe this in terms of the dollar? well, the dollar is able to buy fewer yen, right? it used to be that a dollar could buy 82 yen, but now the dollar is only buying 72 yen.

00:42 So this is the yen appreciating, or if you prefer, it is the dollar depreciating, right? the yen is buying more dollars, and the dollar is buying fewer.

01:01 So the yen is getting stronger, the dollar is getting weaker, right? but we know that the real exchange rate matters for an x, right? it's not just the exchange rate, the nominal exchange rate that matters, but the real exchange rate.

01:25 However, the real exchange rate, which we usually call epsilon, is equal to e times the prices.

01:32 So the real exchange rate is the nominal exchange rate, adjust it for the two prices.

01:37 So here we know those prices are constant, right? so in this case, what's happening, right? from my perspective, this thing is getting weaker, right? so the us dollar is depreciating.

01:55 That means that the real exchange rate is depreciating because the prices aren't changing.

02:07 So if the prices are not changing, the nominal exchange rate behavior passes right through to the real exchange rate behavior.

02:16 This means that u .s.

02:18 Goods are cheaper on world markets.

02:22 The u .s.

02:23 Dollar is not worth as much.

02:24 Other countries can buy u .s.

02:26 Goods more cheaply, cheaper on world markets...