Last but not least, we look at how productivity growth can affect the equilibrium real exchange rate. What is productivity? We have a vague concept of this in our work place, but it has a precise definition — output per man hour. Rising productivity growth causes increased supply of a good. Supply/demand dynamics require that [...]
Archive of entries posted on June 2009
Terms of Trade
Another important aspect of the external balance approach to exchange rate determination is the so-called “terms of trade”, which is the relationship between a country’s export and import prices. A country’s terms of trade can be an important determinant of its long-term equilibrium real exchange rate. We find this particularly the case for countries that [...]