INCOME AND PRICE ADJUSTMENT
437
the United Kingdom (UK), Canada (C), the E.E.C. (E), O.E.C.D./Europe (OE) and O.E.C.D. (O); and Px is the export price index.
The first four équations illustrate the importance of foreign economic activity in the détermination of French exports. The last équation is presented in order to show the subsidiary position of the price variable. Various combinations of prices and incomes were tried. The volume of exports proved not to sharpen the relationship, although a sériés of exports disaggregated to fit the above catégories might conceivably improve mat-ters. In any event, even such disaggregation will show that incomes are of greater importance in this relationship.
What conclusions can we draw from these results? It would seem first of ail that the income variable provides a powerful déterminant of merchandise trade. Prices of imports and exports do not fare at ail well. They are virtually irrelevant if taken by themselves. Relative price changes, of course, are of some significance. This has obvious implications for the rôle of dévaluation in improving the trade balance. The initial increase in French import prices and decrease in the foreign currency price of exports which dévaluation will tend to produce may not greatly improve the trade balance. In a relatively fully employed economy the switch in expenditure which the dévaluation is designed to bring about will be aborted as domestic prices in France rise to nullify the relative increase in import prices and the décliné in export prices (1X). Under these cir-cumstances, the dévaluation must be accompanied by internai demand déflation.
(") There exists in the French case a strong relationship between the foreign trade price indexes and the internai price indexes. The rank corrélation coefficients for the years 1955-1966 are the following:
Px	Pm
CPI	.96	.99
WPI	.96	.90
where WPI is the French wholesale price index. The following régression results further exemplify the close relationship between export and import prices and domestic price levels. CPIt = -50.83 + 1.43 PMt	R2 = -79
(.11)
CPIt = -33.21 + .61 PMt_2 + .68 PM(_,	R2 - -84
(.30)	(.28)
WPIt = -21.52 + 1.21 PMt	R2 = -88
(.07)
WPIt = - 8.55 + .60 PMt_2 + .50 PUt_t	R2 = -91
(.19)	(.17)