Protection and Exchange Rates

The theme of this paper is the relation between exchange rates and trade restrictions. Usually, these topics are confined to different compartments, trade restrictions belonging to the realm of “real” trade theory and exchange rates to “monetary” theory of the balance of payments. However, applied economists working in the field of international economics, especially in relation to problems of developing countries, have for some time felt compelled, and rightly so, to deal with these questions in a unified way rather than in isolation. On the other hand, relatively little theoretical research appears to have been carried out combining these topics in a unified and rigorous manner.1 The aim of this paper is to try to make some progress in this direction and to clarify some of the basic issues that have been discussed in the literature.