Indeed, the real exchange rate can and does move rapidly over time, as economic developments such as a rise in the terms of trade (figure 4) – the ratio of our export prices to import prices – are quickly reflected in its relative price. The fast-moving nature of the real exchange rate means it plays an important role in absorbing shocks to our economy.
When we start trading, unless everyone is balanced, imbalances are inevitable. We are certainly better off trading than not. More conceptually, an economy with abundant investment opportunities relative to its savings, most notably a developing economy, is likely to run a deficit. In this sense, some imbalances are a reflection of enhanced economic welfare.