Question

how does inflation and appreciation effect net exports

Answer 1

Exports more expensive The global price of UK goods would climb – thereby making British exports more competitive for Europeans. Therefore, with a higher demand, we would expect a decrease in the quantity of UK exports. An increase continues to lead to lower inflation because: prices of imports are lower. With an increase, the cost of manufactured products and raw materials will decline, e.g. imported oil will decline, leading to lower gas prices. Lower AD contributes to lower demand-pull inflation. With increasingly high export markets, producers have more opportunities to slash costs to try to remain profitable.

It is a matter of which certain variables are held stable. When the exchange rate adjusted for nominal inflation (i.e. the real rate) remains stable, there will be little influence of supply or demand on the quantities of exports and imports.

However, exchange rates in various countries do not necessarily match relative inflation; other considerations such as interest rates and returns on investment, disparities in the balance of payments, and opinion may also have an impact.