Effect of Exchange Depreciation on a Country's Export Price Level

Abstract

NE OF THE main purposes of exchange depreciation in industrial countries is to lower export prices in order to increase the volume of exports. The question is to what extent and under what conditions exchange depreciation will achieve this objective. When a country depreciates its currency, the gold or foreign currency equivalent of all its prices is reduced in proportion to the reduction in the value of the currency. However, various processes which tend to increase prices in the depreciating country begin to operate immediately after depreciation. These processes will offset partially, or in the limit totally, the effect of the depreciation. The purposes of this paper are to describe these processes of price increases and the factors which determine them, and to find statistical measurements for the extent of the increases and the residual net price fall in terms of gold. The extent of the original depreciation is used as a yardstick against which to measure the price changes. Accordingly, the effectiveness 1 of depreciation is defined as the ratio between the percentage net fall in price (in terms of gold) and the percentage depreciation. If, after depreciation, there is no adjustment whatever of domestic prices in national currency, the effectiveness is equal to unity, or 100 per cent; prices in terms of gold fall by the full amount of depreciation. If, after depreciation, prices in national currency rise by, for instance, 60 per cent of the amount of depreciation, the effectiveness of that depreciation would be measured as approximately 2 0.4, or 40 per cent. If prices in national currency increase by the full amount of depreciation, the effectiveness would be zero. The effectiveness of depreciation may be studied in relation to various sets of prices. In general it will be found to be smaller for wholesale prices, particularly if they include many prices of imported commodities, than for retail prices or the cost of living. In this paper, the effectiveness of depreciation is considered with particular refer-