§ Mr. Austin Mitchell
asked the Chancellor of the Exchequer whether he estimates that the appreciation in the real exchange rate in the current year has been 44W caused by moderation in wage claims or to the tightness of credit.
§ Mr. Lawson
The real exchange rate is a function of nominal exchange rates and relative domestic price levels. It thus reflects a range of factors, including relative labour costs. Moderation in pay settlements will thus lead, other things being equal, to a reduction in the real exchange rate, not an appreciation.
This reduction, in turn, will help to offset the impact of any increase in the nominal exchange rate attributable to a positive differential between United Kingdom interest rates and those overseas.