... price of foreign goods that compete with exports does not fall as demand for them falls, the price of imports in foreign currency does not fall as the demand for imports falls, and the price of domestic goods competing with imports does not rise as the demand for import substitutes increases. As can be seen, there are four elasticities of supply to consider: the elasticity of supply of exports, the elasticity of supply of foreign goods that compete with exports, the elasticity of supply of imports, and the elasticity of supply of home goods that compete with imports. Third, the elasticity approach ignores the monetary effects of depreciations, i.e. effects on the price level which then influence real balances. Particularly if the exchange rates, prices and wages were fully flexible, a depreciation would not work and the economy were always in equilibrium. And finally, it is assumed that trade is initially ...

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