it is said: " The traditional approach holds that a decline in a currency’s real exchange rate will improve the country’s competitiveness. In the short-run, the associated decline in terms of trade increases the cost of imports, which will increase domestic inflation, reduce real income and therefore reduce domestic demand and production. " a decline in a currency’s real exchange rate means domestic currency appreciate, and foreign currency will depreciate. if so, import will cost less. Why it said “increase the cost of imports”? thanks. I follow the text, as exchange rate is quoted as DC/FC.
if domestic currency depreciates, then the foreign currency appreciates, making it more expensive to import foreign goods. Note it says “short run”, long run, parity will run its course
It’s the straight explanation of J curve. Decline of the real exchange rate in this context means the domestic currency depreciates. This will increase the domestic competitiveness because it’s cheaper to buy domestic products. In the short run though, import hasn’t dropped yet, you have to pay more to get the foreign goods you were getting. Export hasn’t picked up, you are getting less for your usual quantity of exported goods. So the real income will dip in the short run.