ABSTRACT
The real exchange rate may be viewed as the relative price between tradable and nontradable goods and services. As such it is particularly useful in understanding certain features of adjustment during economic transition. As Eastern Europe's economies are opened to world trade the tradables/non-tradables mix in national output is altered, a process in which the real exchange rate plays a key role. Tradables are goods and services which have readily available foreign substitutes so that their prices are essentially tied to prices abroad. The small economy is a price taker, so that for given foreign prices the home prices of tradables move with the nominal exchange rate. Improvements in the current account may be achieved without lavishing resources on tradables industries to the neglect of the rest of the economy. The importance of this insight is not always fully appreciated, particularly in view of the contemporary popularity of export-led or trade-led growth and development strategies.
