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if labor unions convinced canadians to buy canadian it will improve the canadian trade balance the...

if labor unions convinced canadians to buy canadian it will improve the canadian trade balance

the answer is False

I thought export is constant but import goes down so net export will move upward , and it would make real exchange rate higher

but the answer was NX is not changed because NCO does not change

can you explain why it does not affect anything?

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Answer #1

This will initially increase the sale of domestically manufactured goods and services and imports will fall so that net exports initially increase. However, since there is no change in the real interest rate and there are no capital inflows, /outflows consequently, this event can be seen as an upward shift in the downward sloping net exports curve when the saving - investment line is vertical. There will be a resultant appreciation of the currency which means real exchange rate appreciates so that exports are reduced and imports are increased so much so that net exports reduce and reach their initial level.

Because net exports remain unchanged there is no improvement in trade balance.

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