An Empirical Analysis of the Effect of Exchange Rate Changes on Goods Prices

It is widely believed that changes in foreign currency exchange rates can affect the prices of goods in domestic markets as well as the prices of traded goods. A question of interest to economists, businesses and policymakers is: What determines which industries are most affected by exchange rate changes? This article examines the importance of two factors on the responsiveness of individual goods prices to exchange rate changes: the distribution of consumption and production of a particular good across countries.