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# relationship between RER (real exchange rate) and net exports

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1.1
What is the relationship between RER (real exchange rate) and net exports (NX i.e. the current account balance)? Plot it as a line in the RER-NX space (vertical, horizontal, upward sloping or downward sloping) and then plot the S-I (private saving minus investment) quantity on the same graph. Discuss the significance of the intersection, how will it be affected by private consumption and government spending decisions?

1.2
Show and discuss the "Gap" model in the context of the RER-NX graph in 1.1, use other graphs if necessary.

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This is an international finance course, but these questions are economic theory. I am having problems trying to solve and understand. i do not see the connection between RER and savings and investment...can you please provide step-by-step explanations?

https://brainmass.com/economics/foreign-relations/relationship-between-rer-real-exchange-rate-and-net-exports-68848

#### Solution Summary

Depict the relationship between RER (real exchange rate) and net exports.

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## These questions completely baffle me

1. Explain the difference between the real exchange rate and the nominal exchange rate.

2a. If a Japanese car costs 500,000 yen, if a similar Canadian-produced car costs \$10,000, and if a dollar can buy 100 yen, what are the nominal and real exchange rates?

2b. Explain the relationship among saving, investment, and net foreign investment.

3. Explain two reasons why purchasing power parity does not hold for all goods and services.

4. What is happening to Canada's real exchange rate in each of the following situations? Explain.