Immediate Effects of Devaluation on Prices of Raw Materials

Abstract

T HE DEVALUATIONS of September 1949 stand in sharp contrast to those of the thirties in that nearly all of them took place within a short period of time and were not, as in the thirties, carried through piecemeal.1 This makes it possible to construct a simple theoretical model by means of which the impact of devaluation on the prices of raw materials may be studied. A formula may be derived for the estimation of this effect and, under certain conditions which can be regarded as normal, this formula depends only on the extent of the devaluation and the relative shares of the devaluing and non-devaluing areas in the total supply of and demand for the product under consideration. In theory, the effect also depends on the elasticities of demand and supply in the devaluing and non-devaluing areas. In fact, however, for commodities of which less than one fourth of the combined supplies of the two areas is traded between the areas, the influence of different elasticities on the effect of the devaluation is slight. Consequently, as long as less than one quarter of the total supply moves between the two areas, the simplified formula provides a satisfactory approximation. In order to estimate changes in raw materials prices resulting from the devaluations of September 1949, it may be assumed, for simplicity, that the world is divided into two major groups of countries-those whose currencies have been devalued to approximately the same extent as sterling (the sterling market) and those whose currencies have maintained more or less their previous dollar parities (the dollar market). Supplies of raw materials, and likewise demand for raw materials, come from both groups of countries but not to the same extent for different commodities. Under the assumption that supply and demand in these two groups of countries are not isolated, i.e., that the markets are merged, the prices in the two markets must, costs of movement aside, be the same at any given rate of exchange. Devalua-