The Effect of Exchange Rate Changes Upon International Price Discrimination

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Abstract
The recent advent of a regime of flexible exchange rates has emphasized the need for an understanding of the transmission of exchange rate changes to price changes. The extent and circumstanes of the pass through of exchange rate changes to the prices of internationally traded goods has undergone only limited investigation due to theoretical and empirical limitations relevant for such an analysis. Unlike the view of the international price system system which is based on the "law of one price," this paper presents evidence that prolonged devergences between export and domestic price changes for narrowly defined SITC goods within the United States exist and are influences significantly by factors predicted by a model of discriminating monopolist. Theoretically, the elasticity approach, through vulnerable to criticism concerning its partial equilibrium framework, allows a detailed analysis of the effect of exchange rate changes upon the prices of traded goods. The classic graphical analysis, originally presented by G. Haberler, of the effect of an exchange rate change upon the balance of trade, demonstrates the applicability as well as the drawbacks of the elasticity analysis with respect to our interest concerning the price effects of exchange rate changes.

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