Question

If prices in Germany fall at the same time that the euro appreciates, we will be able to immediately predict the impact on net exports.

True or False

Answer 1

We can predict the impact on net exports when the price of products fall in Germany and euro appreciates.

When exchange rate changes, the price of imported goods will change in value including domestic product that relay on imported parts and raw materials. In this era of globalization, goods from other countries are as common place, exchange rate have significant impact on price you pay for imported product. A weaker domestic currency means that the price you pay for foreign goods will generally rise significantly. The change in price of imported products depends on how the currency of exporting nations have fared against the domestic currency. A weak domestic currency can push up the inflation rate in nation because of high price for foreign product. This may induce the central bank to raise the interest rate to counter inflation as well as to support the currency and prevent it from plugging sharply.

A fall in price in German will stimulate net exports and make import more expensive. Conversely, a strong domestic currency hamper exports and make imports cheaper.