EVENTS IN INTERNATIONAL MONEY MARKETS since 1971 have aroused considerable interest in the effects of changes in foreign exchange rates on trade patterns. In any theoretical approach, the prices of traded goods are crucial to economic activity following devaluation. Because the quantities of exports and imports may be inflexible for a time following a devaluation, price changes determine the movement in the trade balance in the short run. “Currency-contract analysis” deals with the first round, or impact, effect of devaluation on the prices of internationally traded goods that cross national boundaries after devaluation but that were contracted for before it took place. The crucial determinant of this effect on the trade balance is whether these contracts are denominated in home currency or in foreign currency.
