Homework Answers
Answer.)
a.) Not only are there usually lags in the response of a nation's trade and current account balances to a depreciation of its currency, but also the Increase in the domestic price of the imported commodity may be smaller than the amount of the depreciation - even after lags. That is, the pass-through from depreciation to domestic prices may be less than complete. The reason is that foreign firms, having struggled to successfully establish and Increase their market share in the nation, may be very reluctant to risk losing it by a large Increase in the price of its exports and are usually willing to absorb at least some of the price increase that they could charge out of their profits. Specifically, a foreign firm may only Increase the price of its exports commodity by 4 percent and accept a 6 percent reduction in its profits when the other nations currency depreciates by 10 percent for fear of losing market share. That is, the pass-through is less than 1.
b.) When a currency depreciates causing the import product price to increase, this effect is called PASS-THROUGH from depreciation .
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