STRUCTURAL APPROACH TO ANALYZE THE EFFECTS OF EXHCHANGE RATE ON IMPORT DEMAND
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The effect exchange rates have on local prices may induce a change in relative prices
and import demand. This study shows that substitutability, endogeneity of foreign
price, elasticity of substitution, and degree of returns to scale influence the impacts
exchange rates have on relative prices and import demand. In an empirical
examination of the Korean beef market, this study found a decrease in relative prices
and an increase in import demand when the U.S. dollar depreciates, and an increase
in relative prices and a decrease in import demand when the U.S. dollar appreciates.
However, the effect on relative prices is greater than the effect on import demand,
implying that the foreign price elasticity of import demand is less than one.