Wednesday, October 28, 2009

How could the exchange rate interfere with trade flows if each country has a comparative advantage?

Competitive advantages generally mean that the producing nation can produce a certain product, of equal quality, cheaper than other nations.



If the real exchange rate is extraordinarily high, this will cause their exports to have an artificially higher price----which offset competitive advantage.



On the flip side, if a nation has relatively inefficient production, but an artificially low exchange rate, they can still run a net export trade balance.

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