On the Concept of the Foreign Exchange Multiplier

Although in recent years there has been increasing recognition of the importance of intermediary imports, the conventional Keynesian treatment of aggregate ” supply has-generally been adopted. By assuming supply elasticity and conditions of over-production, such imports are treated as a leakage and-therefore deflationary. This paper investigates another special case which may be a more realistic model for many industrialising economies like Pakistan. Namely, J,y assuming supply bottlenecks and the technical dependence of domestic production on imported inputs, an increase in imports may be inflationary and have an import or foreign exchange multiplier effect.