Chapter 4


Figure 4.3: Main lines of impact of exchange rate policies on the food economy


3.3.2 Impact on food prices

In Annex 2B is shown that the direct effect of an exchange rate devaluation is an increase in
the domestic prices of tradables. In theory, the price of importables as well as exportables
will rise according to the proportion of the exchange rate devaluation. If, for example, the
world market price (border price) of an imported/exported good is $US 100 and the
exchange rate is devalued from 50 to 75, the domestic price will increase by 50 per cent from
5000 to 7500 local currency units (see Annex 2B).

In practice, there are several factors which lead to modification of the price effects, as
compared to the assumptions of the model:

1) The existence of a multiple exchange rate system before devaluation:
 Before adjustment, countries often operate a multiple exchange rate systems. Different
 exchange rates are applied to different types of commodities or transactions, e.g.
 preferential exchange rates are granted to imports of essential goods such as basic food
 commodities (possibly only to selected importers/traders).


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