IMPACTS OF EXHCHANGE RATE ON TERMS OF TRADE AND VOLUME OF TRADE

Direct and indirect effects of exchange rates on foreign and home prices may induce a change in terms of trade and volume of trade. In particular, the price effect in substitutability between foreign and home products and endogeneity of the foreign price provide evidence for the indirect impact of the exchange rate on home price. Furthermore, elasticity of substitution and degree of returns to scale influence the impact of the exchange rate on terms of trade and trade volume. In an empirical examination of the Korean beef market, this study found a decrease in terms of trade and an increase in volume of trade when the U.S. dollar depreciates, and an increase in terms of trade and a decrease in volume of trade when the U.S. dollar appreciates. However, the effect on terms of trade is greater than the effect on volume, implying that the foreign price elasticity of import demand is less than one.