Export and Domestic Prices Under Inflation and Exchange Rate Movements

Rosenzweig for data collection and programming and to Eliot Kalter of the University of Pennsylvania for the matching of U.S. export and domestic price data for the latter part of the period.6. B's domestic prices will rise, as a result of the decrease in supply, but not by as much as B's export prices did.A depreciation in country A's exchange rate relative to country B, arising perhaps from speculative or capital movements, might produce the following sequence of events:1'. A's export prices in A's currency rise relative to domestic prices.2'. Exporters in A finding export margins higher relative to domestic margins shift sales from domestic to export markets.3'.The shift to export markets causes an increase in domestic prices in A but by less than the increase in export prices.4'.The decline in A's export prices in foreign currency, relative to B's prices, produce a shift of buyers from B to A.5'.The fall in demand for B's exports brings about a decline in B's export prices, a reduction in export margins relative to domestic margins, and a shift from export to domestic sales.were not present in, or smaller in the indexes based on own-currency prices.Thus we must consider the possibility of treating exchange rate changes as an independent variable affecting relative prices.Since the evidence is strong that there are divergences between export and domestic prices, 'e wish to trace through the effects of foreign price changes and exchange rate changes on export and domestic prices and see whether a mechanism of the hypothesized type exists.In this paper we concentrate our attention on price movements, but offer some evidence that the response of exports to these price divergences is in the expected direction. DataThe origin of this study is in the.data collected for the original Price Competitiveness study.2The price indexes published originally for 2 Kravis and Lipsey (1971].U.S., U.K., German, and Japanese international trade in metals and machinery for 1953, 1957, and 1961-64 were based on a substantial amount of original price collection and form the foundation for our later work.These indexes were interpolated for the Intervening years by whatever data were available3 3 As described for the German indexes in Kravis and Lipsey [1972].As was clear from some earlier analyses,6 export and domestic prices 6 See footnote 1.are not identical, do not move identically, and sometimes are not even very highly correlated.However, the correlation is higher for the United States than for the other three countries for which comparisons were made, and high enough that each type of price would usually be significant in an equation for the other type.Since some part of the correlation between the two sets of prices may represent not an impact of one on the other, but the fact that common factors operate on both, there is some advantage in concentrating on the ratio of export to domestic prices.If, as we hypothesized above, export prices are more sensitive, and/or more quickly sensitive to foreign economic developments than are domestic prices, we should find that a rise in foreign prices, other things equal, increases the ratio of export to domestic prices.An increase in foreign income should have the same effect.Similarly, a devaluation of the U.S. dollar relative to other currencies should produce a relative rise in U.S. export prices even if foreign prices, in foreign currency, do not increase.The course of the ratio of U.S. export to domestic prices of machinery and transport equipment (SITC 7) over the period from 1953 through 1975 is described in Chart 1, along with the movement of U.S.