The Short-Run Impact of Development on the Cost of Production

The purpose of the present note is to illustrate that although our knowledge of the consequences of devaluation is too limited to warrant reliable policy recommendations, it is well within the competence of the economist to build simple models illuminating certain aspects of the devaluation problem. We shall concentrate on only one aspect, the increase in costs of production which results from a price increase of imports. The question posed is: what increases in cost of production will occur if Pakistan decides to devalue its currency by 50 per cent? It will be shown in the next section that, on certain assumptions, this question can be solved easily with an input-output model. In Section II some implications of our calculations will be given. Finally, in Section III some conclusions will be drawn.