Japan produces and exports only cameras, and Saudi Arabia produces and exports only barrels of oil. Initially, Japan exports 40 cameras to Saudi Arabia and imports 64 barrels of oil. The real exchange rate is 4 barrels of oil per camera. Neither country has any other trading partners.
a. Initially, what is the real value of Japan's net exports, measured in terms of its domestic good?
b. The real exchange rate falls to 3 barrels of oil per camera. Although the decline in the real exchange rate makes oil more expensive in terms of cameras, in the short run there is relatively little change in the quantities of exports and imports, as Japan's exports rise to 42 cameras and its imports fall to 60 barrels of oil. What has happened to the real value of Japan's net exports?
c. In the longer run, quantities of exports and imports adjust more to the drop in the real exchange rate from 4 to 3, and Japan's exports rise to 45 cameras and its imports of oil fall to 54 barrels. What are Japan's real net exports now?
d. Relate your answers to Parts (b) and (c) to the J-curve concept.