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We can reinterpret our model to accommodate an imported input.
An increase in the international price of the imported input can be reinterpreted as a negative productivity shock in the sector where the input is employed.
For a linearly homogeneous Cobb Douglas production function on (K,L) and the imported input (F), we can write the value-added function ({text{VA}} = Y - p_{text{f}} F).
However, if the production function were instead to include an additional imported input with a low elasticity of substitution, then an increase in the price of that input could be interpreted as a change in A and/or M. Homogeneity of degree one allows us to ignore distributional issues in computing the steady state of the economy and studying its equilibrium properties.
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If the money is used to buy imported inputs, the company gains.
Many of them, however, depend on imported inputs and involve considerable repatriation of profits.
Partly that's because pharma uses a lot of imported inputs, so that it has relatively low domestic content.
As a result, many of Britain's exports require imported inputs; so when sterling depreciates and import prices rise, the knock-on effect on export prices renders them less competitive.
But a fall in exports alone is unlikely to trigger a balance-of-payments crisis, since it will be accompanied by a big fall in imported inputs.
They estimate that the value of imported inputs as a percentage of total nonenergy inputs in manufacturing in the United States reached 16.4 percent in 2010, up from 12.5 percent in 1998 and 6.2 percent in 1984.
Manufacturers that rely on imported inputs may resist higher tariffs because they push up the prices of those inputs, making domestic industry less competitive.Governments using tariffs as trade weapons now have to calculate the consequences far more carefully.
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