A country's currency depreciates from 2.00 domestic units per Canadian dollar to 2.40 domestic units per Canadian dollar. Six months later, exports rise from $60 billion to $70 billion and imports fall from $75 billion to $68 billion. Following the change in the exchange rate, which statement correctly describes the change in net exports (NX) using the definition $NX = X - M$?
- NX rose from billion to billion because exports increased and imports decreased after depreciation. (correct answer)
- NX fell from billion to billion because exports decreased and imports increased after depreciation.
- NX rose because imports fell, which by itself guarantees that exports must also fall by the same amount.
- NX fell because depreciation makes imports cheaper and increases the quantity of imports demanded.
- NX rose because depreciation causes foreign investors to purchase domestic assets, increasing net exports.
Explanation: Net exports (NX) are simply exports minus imports, using the formula NX = X - M to assess trade impacts. Exchange rates influence relative prices, with depreciation making domestic goods more attractive abroad and imports costlier, fostering positive NX changes. After depreciation from 2.00 to 2.40 domestic units per Canadian dollar, exports rose from $60 billion to $70 billion and imports fell from $75 billion to 15 billion to +$2 billion. A misconception is that depreciation increases imports by making them 'cheaper,' but it actually raises their domestic price, reducing quantity. Remember the transferable strategy: a strong currency increases imports and decreases exports, leading to lower net exports.