# Depreciation of local currency and its effect on prices

I have problem with an article Lee H., C. Park, 2013, International Transmission of Food Prices and Volatilities: A Panel Analysis.

Authors wrote: Difference in log of exchange rates (LOC/ $)- As depreciation of local currency (LOC) against the US dollar will result in higher domestic prices of imported food products in local currency, this variable is expected to carry a positive sign. Variable (LOC/$) has positive sign in there econometric model. How it is possible?

When exchange rate (LOC/$) rises we have aprreciation of local currency so food prices are lower. I think that the sign should be negative Can someone help me? ## 1 Answer I think you're getting tripped up by notation. Instead of LOC/\$, write \$/LOC, since international trade is most likely to take place using$USD as an intermediary currency.

Here's an example:

Suppose world prices for soybeans are \$150/ton USD. Today, the Wakandan widget (W) trades at 75W/\$ - so, I suggest rewriting this as $1/75W. Then, absent tariffs, taxes, and other frictions, Wakandans can import US soybeans at 11,250W/ton. Now suppose the widget depreciates - it now trades at 150W/\$. Notice that the sign of this change is positive, because you need more LOC to buy a unit of USD. But if you rewrite as $1/150W, the sign of this change is negative, fitting the intuition that the LOC has become less valuable. And indeed, now Wakandans must pay 22,500W/ton to import US soybeans - a change that would be reflected by a positive sign. The value change of the LOC is negative, leading to a positive change in the price for imports. Make sense? • Yes, make sense. I think in this way, but the notation LOC/$ is used several times in this article. Did you read it? – los6996 Jan 6 '20 at 22:07
• It's just an inverse of the ratio, and is mathematically consistent either way. The way I present it is just more in-line with the intuition that is leading to your confusion (and understandably so). You'll run into this a lot in almost any field - being a good researcher, and writing easily-readable research, are two different skillsets. Not everyone is a master of both. :) – heh Jan 6 '20 at 22:34