Currency Appreciation's Impact on Import Prices by Type

Steps:

• Currency appreciation strengthens the domestic currency, reducing the amount needed to buy foreign currency.
• Raw material imports, often priced in stable international markets like commodities, become cheaper in domestic terms.
• Manufactured goods imports involve higher value-added components and producer pricing power, leading to partial pass-through where foreign prices adjust upward.
• Net effect: raw materials fully benefit from cheaper exchange rate, while manufactured goods see muted or reversed price drops.

Why B is correct:

• Appreciation lowers raw material import costs via exchange rate (domestic price = foreign price × exchange rate, where rate falls), but manufactured goods prices rise due to incomplete exchange rate pass-through, as defined in international trade economics where exporters maintain margins.

Why the others are wrong:

• A: Ignores differentiated pass-through for manufactured goods, assuming uniform cheapening.
• C: Reverses the raw materials effect, which directly cheapens under appreciation.
• D: Contradicts basic exchange rate impact, making both cheaper overall.

Final answer: B