Competitiveness and Proportional Changes
Suppose the currency of a home country depreciates nominally by 10% against a foreign currency. In the same year, the home country experiences 15% inflation, while the foreign country experiences 5% inflation. Calculate the approximate percentage change in the home country's real exchange rate and explain what this implies for the international competitiveness of its goods.
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Consider an economy where the nominal exchange rate depreciates by 50% relative to its main trading partner. In the same time frame, due to a significant increase in productivity, the domestic price level falls by 50%, while the trading partner's price level remains constant. What is the net effect on this economy's international competitiveness?
Currency Appreciation and Export Competitiveness
A 20% nominal depreciation of a country's currency will invariably lead to a 20% increase in its international competitiveness (a 20% real depreciation).
Competitiveness and Proportional Changes
Match each economic scenario with its resulting impact on the home country's real exchange rate and international competitiveness. Assume the real exchange rate is calculated as the nominal exchange rate divided by the ratio of the domestic price level to the foreign price level.