2. What do you think determines real exchange rates in the long run?

In the long run, the real exchange rates will be affected by the inflation rate, long term
investments profitability, long term real GDP growth rates, productivity and trade policy of
the country. The inflation rate affects the real exchange rates as a relatively lower inflation
rate than other countries signify that there is an appreciation in value of the currency
against the other currencies. This is because the higher inflation in one country will lower
the purchasing power and look for alternatives from abroad. Thus, the increase in demand
for foreign currency and increase in supply of their domestic currency will cause the lower
Over the long haul, the genuine trade rates will be influenced by the expansion rate, long
haul speculations benefit, long haul genuine GDP development rates, efficiency and
exchange strategy of the nation. The expansion rate influences the genuine trade rates as a
moderately lower swelling rate than different nations imply that there is a thankfulness in
estimation of the money against different monetary standards. This is on the grounds that
the higher swelling in one nation will bring down the buying force and search for options
from abroad.exchange rate.

Furthermore, optimum long term investments profitability will encourage foreign investors
to invest in the country. This will influence and appreciate the host country currency as there
is higher demand for the host country’s currency. An example will be the United States.
Their strong infrastructure attracts many foreign talents and investors to the United States
and it is evident from its high capital account surpluses.

The trade policy will also affect the exchange rates as protectionist stance will likely increase
the prices of imported goods and make it more expensive for the local market. This will
eventually lead to a lower demand for imported goods and thus a lower demand for foreign
currency.

Conclusion :

In the long run, the real exchange rates will be affected by the inflation rate, long term
investments profitability, long term real GDP growth rates, productivity and trade policy of
the country. The inflation rate affects the real exchange rates as a relatively lower inflation
rate than other countries signify that there is an appreciation in value of the currency
against the other currencies. This is because the higher inflation in one country will lower
the purchasing power and look for alternatives from abroad. Thus, the increase in demand
for foreign currency and increase in supply of their domestic currency will cause the lower
Over the long haul, the genuine trade rates will be influenced by the expansion rate, long
haul speculations benefit, long haul genuine GDP development rates, efficiency and
exchange strategy of the nation.