This thesis examines the relationship between the real exchange rate and labour productivity levels in the context of a small open economy of Australia. In contrast to traditional theory on the causal relationship which exchange rate movements to productivity growth performance, this study examines if causation runs in the opposite direction. In particular, the recent slide of the Australian dollar over the post float period, from Dec 1984 to Dec.2002 were examined to see if it may have contributed to factors that can undermine the economy's productivity performance. In this study, three causal mechanisms were discussed in which movements in the exchange rate can have an impact on productivity. One, the factor cost effect of a depreciation which raises the cost of imported investment goods. Two, the impact of a depreciation on innovation and R&D; sustained exchange rate depreciations raise the cost to imported technology and shift profit opportunities where price competition works relative to competition on new or improved product and process innovation. Three, exchange rate depreciations can create "sheltering effect"; Australian are "sheltered from the full weight of foreign competition by a low dollar, and thus have not made the productivity improvement that would lead to greater prosperity. Two sorts of evidence are reviewed. First, a descriptive analysis of the data relevant to the relationship between the real exchange rate and productivity was examined. Next, an econometric testing procedure using a granger causality framework is tested to see if the causal relationship holds for Australia. The results of this paper are divided into two key sectors in the economy, traded and non-traded sectors. The results indicate no evident effects of these three channels on the non-traded sector, but some support was obtained for the traded sector.