Pilbeam's textbook on International Finance (p. 106) says:

(...) the immediate effect of a devaluation of exchange rate from $S_1$ to $S_2$ is to make domestic good competitive (...)

How can be possibile that an exchange rate devaluate from $S_1=\frac{p_1}{p^*}$ to $S_2=\frac{p_2}{p^*}$ with $S_2>S_1$? Here $p_1$ and $p_1$ are domestic prices and $p^*$ is a foreign country prices.

Shouldn't be the otherwayround instead, since the domestic currency is gaining value against $p^*$ ($\uparrow{S} \rightarrow \uparrow{p} $ via $S\cdot p^*=p $)?

  • $\begingroup$ I don’t have the textbook, and I need to guess at your notation. I assume you are comparing the prices for the same good in domestic and foreign currencies? If so, a rise in the domestic quoted price means you need to pay more of your domestic currency to buy the same product, which means that your currency fell in value. $\endgroup$ Commented Apr 30, 2018 at 11:08


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