Pass-through is the measure of response of imported and exported product prices to exchange rate changes. Assume that the price in dollars and euros of a BMW automobile produced in Germany and sold in the United States at the spot exchange rate is Ps Pe BMW BMW ($ / ) = 35,000 x $1,000 / = $35,000 If the euro were to appreciate 20% versus the U.S. dollar, from $1.0000/ to $1.2000/, the price of the BMW in the U.S. market should theoretically be $42,000. But if the price of the BMW in the U.S. does not rise by 20%-for example, it rises only to $40,000-then the degree of pass-through is partial: P$ BMW, 2 $40,000 $35,000 1.1429, or a 14.29% increase. P$ BMW,1 The degree of pass-through is measured by the proportion of the exchange rate change reflected in dollar prices. In this example, the dollar price of the BMW rose only 14.29%, while the euro appreciated 20% against the U.S. dollar. The degree of pass-through is partial: 14.29% 20.00%, or approximately 0.71. Only 71% of the exchange rate change was passed through to the U.S. dollar price. The remaining 29% of the exchange rate change has been absorbed by BMW.