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I am newbie here and I am not sure if I am writing in Macroeconomics forum! I have a question regarding Macroeconomics concept! Here it is!
In the textbook of Macroeconomics by Olivier Blanchard, in the chapter relating to The Goods Market in An Open Economy, it introduce the extended version of IS relation which is Y = Z = C(Y-T)+I(Y,r)+G-IM/e+X
Everything is clear but I cannot understand why imports (IM) should be divided by "REAL EXCHANGE RATE (e)" instead of "Nominal Exchange Rate (E)"?
Don't we want to derive the value of the GDP from this formula? If so, don't we want to have our value in terms of domestic currency? And again if it is the case, why we just don't multiply the imported goods with their foreign price and then divide it by the nominal exchange rate which is the currencies exchange rate? How dividing the value of the total imported goods by the real exchange rate is going to help us??
I am totally confused here and within a week I have to do the exam! I can simply accept this fact as given and have my mark but I really want to understand the implication here. I would be more than appreciate for your help!
Thanks in advance!