INTL 2200 Lecture Notes - Lecture 16: Devaluation
25 Mar 2016
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Ch17: absorption (monetary) approach to b of p. Depreciation (devaluation): e increases > nx increases (net exports increases) For example, assume a country is a net importer of oil and a net producer of ships. Initially, the devaluation immediately increases the price of oil, and as consumption patterns remain the same in the short term, an increased sum is spent on imported oil, worsening the deficit on the import side. Meanwhile, it takes some time for the shipbuilder"s sales department to exploit the lower price and secure new contracts. Only the funds acquired from previously agreed contracts, now devalued by the currency devaluation, are immediately available, again worsening the deficit on the export side. Pass-through: the extent to which an exchange rate change is reflected in the prices of imported goods. With full pass-through, a currency depreciation, which increases the price of foreign currency, would increase the prices of imported goods by the same amount, and vice versa.
