Chapter 14

Protectionism, Devaluation, and the Terms of Trade


The exchange rate and terms of trade are two variables that are intertwined and quite often are used as a proxy for one another. While under some circumstances the interchangeability may be appropriate, that is not always the case. An exchange rate measures the price of one currency in terms of another. In turn, the terms of trade measure how many units of the foreign goods can one unit of the domestic good acquire. If the ratio of the Consumer Price Index (CPIs) in local currencies remains unchanged, the terms of trade and exchange rates will move in the same proportion, that is, the precise conditions under which the nominal exchange rate and the terms of trade are equivalent ...

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