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Exchange Rate Changes and the Choice of Technique

In: Fundamental Issues in Trade Theory

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  • L. Mainwaring

Abstract

Shortly after the appearance of his ‘absorption’ approach to the effects of devaluation, S. S. Alexander [1] was criticised by Fritz Machlup [3] for conducting his argument in terms of the overall price level rather than in terms of relative prices and, therefore, failing to take account of resource allocation effects resulting from relative price changes. In this essay we consider a dynamic absorption model (dynamic in the sense of steady growth) which is of a rather more disaggregated variety than usual. Since it is set in a Sraffa-Leontief framework relative prices are of central importance, but not merely because of straightforward consumer substitution effects. Because of production interrelationships, relative prices exercise an influence on the choice of technique appropriate to any exchange rate. This, in turn, may lead to modifications of the traditional absorption conclusions.

Suggested Citation

  • L. Mainwaring, 1979. "Exchange Rate Changes and the Choice of Technique," Palgrave Macmillan Books, in: Ian Steedman (ed.), Fundamental Issues in Trade Theory, chapter 15, pages 188-200, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-1-349-04378-1_15
    DOI: 10.1007/978-1-349-04378-1_15
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