Exchange rates, prices and consumption

The exchange rate is often considered the most important price in the economy. Exchange-rate changes significantly affect the profitability of exporters, the prices paid by consumers, as well as complicating international economic comparisons. I find that despite the prolonged gyrations of currency values and the multitude of trade barriers, the forces of arbitrage and resource re-allocation are sufficient to overcome many of these distortions in agricultural markets over the longer term. I also show how diverse consumption behaviour across countries can be unified and characterised by a simple economic model with incomes and prices as the main determinants.