How does a lower real exchange rate affect the expense of domestic goods relative to foreign goods?

When the real exchange rate decreases, this indicates that domestic goods have become less expensive relative to foreign goods. A lower real exchange rate effectively makes domestic products more affordable for both domestic consumers and foreign buyers. As a result, domestic goods become more competitive in the international market, leading to an increase in the demand for these goods by foreign consumers.

This increased competitiveness stimulates exports, leading to a greater demand for net exports. In this context, net exports refer to the difference between what a country sells to others (exports) and what it buys (imports). Since exports rise as domestic goods are now cheaper for foreign buyers, the overall demand for net exports increases.

This relationship demonstrates the fundamental principles of international trade and how currency valuation impacts the relative pricing of goods on a global scale, ultimately influencing consumer behavior and trade balances.