already considered the effect of a changing rate of foreign : exchange-rate variation will had no real effect; it will simply offset the monetary effects of a difference in the rates of inflation of money prices. Second, it is possible that the rates of general price inflation do not differ in the two countries. In this case, a depreciation of the pound by increasing the number of pounds needed to purchase a given amount of foreign currency would raise

doi:10.4324/9780203814628-92

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already considered the effect of a changing rate of foreign

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ABSTRACT

If the flows of trade are not immediately altered, the depreciation of the pound by 10 per cent will leave the sterling value of exports unchanged but will raise the sterling price of imports by 10 per cent, since 10 per cent more pounds are needed to purchase a given foreign currency value of imports. There will be a corresponding negative effect upon the country's balance of payments on current account. But as purchasers at home and abroad shift their purchases from foreign on to domestic suppliers, the value in sterling of the country's exports will rise and of its imports will fall. Ultimately it is likely that this substitution of domestic for foreign products will go far enough not merely to offset the initial deterioration in the balance of payments but to cause a substantial and lasting improvement in it.