THE THEORY OF EXCHANGE 153
state of balance of payments is an important factor even
in the latter, but all kinds of psychological influences
also come into play, and it is therefore quite impossible to
argue in such cases as if the balance of payments were the only
factor which determines the rate of exchange.
§S 9. Purchasing power parity as a function of the rate of
exchange.
But there 1s more to be said. When Mr. Cassel con-
siders that the rate of exchange is determined by the
parity of purchasing powers, he forgets that #kis parity is in
itself a function of the rate of exchange. For supposing that
the pound stands at 70 francs, whereas according to the
purchasing power parity it ought to stand at 5o, surely
internal prices in France will soon rise, from the mere fact
of a rise in the price of imported commodities. There-
upon, as the franc will have a smaller purchasing power
even in France, the purchasing power parity between France
and England will be altered and will be consistent with a
greater exchange depreciation of the franc.
The influence of the exchange on internal prices
certainly varies from one case to another; it depends, no
doubt, on the kind of commodities imported, and on the
relative importance of foreign trade in the economic life
of the country. But the exchange also affects the price of
goods which can be exported; for even if, as was pointed
out above, exporters are not in a position to obtain the
entire profit on foreign sales for themselves, they do
attempt to retain a large proportion of it, and the rise in
the price of exportable commodities in terms of the home
currency, which results from their profit on the exchange,
reacts on the internal market. Hence it is certain that the
exchange will always affect internal prices, though in
varying degrees, and so in itself modify the purchasing
power parity which 1s supposed to have determined the
rate.
Lastly, there are other psychological motives which,
with an exchange already greatly depreciated, tend to
