Question

Suppose that during a family get-together, an uncle who has business ties with South Korea finds out that you have been taking macroeconomics and approaches you to have some discussions regarding current events. He wants to know how fears of the coronavirus that lowers investment demand in South Korea, a small open economy, would impact its net exports. Respond to him with the model explaining the relationship between net exports and the real exchange rate. Make sure that you use both words and figures to explain your logic.

Answer 1

NOMINAL AND REAL EXCHANGE RATE

Nominal exchange rate tells us about how much foreign currency can be exchanged for a unit of the domestic currency. The values will be different at different time. And on the other hand real exchange rate denotes, that how much goods and services in the domestic country can be exchanged for the goods and services in the foreign country.

Real exchange rate= [Nominal exchange rate x domestic price] / [foreign price]

This equation clearly denotes the idea of the Nominal and the real exchange rate, and also explains about the relationship between these two rates. Real exchange rate depends upon the nominal exchange rate, it is clear from the above equation.

RELATIONSHIP BETWEEN NET EXPORTS AND REAL EXCHANGE RATE

When the Real exchange rate is too high, which means the relative price of goods is much high in the home than the relative price of the goods outside that nation. In such a situation import is most likely to followed, because of the low relative price of that good in abroad. So when the real exchange rate is high, there will be an increase in the import and as a result of this net export will be decreased.

Like that when the Real exchange rate is low, the relative price of the good will be low in the home country and in such a condition there will be an increase in the net export of the goods.

EFFECT ON SOUTH KOREAN ECONOMY

South Korea is one of the nation which has affected a lot with the spread of the Corona virus { Covid-19}, most fields in the economy are seriously effected. Before the outbreak of the virus, many industries closed down because the supply chain had interrupted. There we can see a trend, a slow down in the economy is observed. There calculated a disruption of $17 billion in the GDP of the nation. Now we can analyze only the short term consequences and the long term consequences, to be calculated. If this slow down continues, then nation will have to face an economic recession.