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Do Falling Import Prices Increase Market Demand for Domestically Produced Consumer Goods?

By John J. Heim


Rising exchange rates can lower prices on imported consumer goods. The lower prices have two effects. A substitution effect shifts in demand from domestically produced goods to imports. An income effect also allows more import purchases. It also allows some income previously spent on imports to be shifted to domestic spending. This shift may or may not increase total demand for U.S. consumer goods. This paper finds it does, and that increases in demand for domestically produced consumer goods and services are about five times as large as the increase in demand for imported consumer goods and services. The paper also finds that the increase in demand for domestic goods is about three times as large as the increase in the trade deficit resulting from the higher exchange rate.

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