Ceteris paribus, a real depreciation of the Canadian dollar will decrease net exports in Canada.

Question

Quizplus · Accepted Answer

A real depreciation of the Canadian dollar makes Canadian exports relatively cheaper and more competitive in foreign markets, which should increase net exports (exports minus imports). Therefore, a real depreciation of the Canadian dollar should increase net exports, not decrease them. However, this statement includes the ceteris paribus assumption, which means that it assumes that all other variables, such as domestic and foreign income, prices, tastes, and tariffs, remain constant. In reality, changes in these variables can affect net exports in different ways and may partially offset or reinforce the effect of a real depreciation of the Canadian dollar.

Ceteris Paribus, a Real Depreciation of the Canadian Dollar Will