This paper analyzes the impact of policy-induced exchange rate changes(devaluations) on the functional income distribution between owners ofdifferent production factors in a dynamic general equilibrium model of thesmall open economy that produces traded and non-traded goods. In thisheterogeneous agents’ optimization model, workers are assumed to movefreely between the sectors with a flexible wage rate while installed capital issector-specific and new capital goods are constructed by combining non-tradedinputs with imported machines. Various simulation results show that realreturn on capital in the nontradables sector always falls while that in thetradables sector invariably jumps up on impact following devaluation.Interestingly, real wage jumps up, stay unchanged or falls on impact followingdevaluation depending mainly on relative factor intensity of the two sectors andthe share of imported machines in production of capital goods. The results ofthis heterogeneous agent model are strikingly similar, qualitatively andquantitatively, to those of the representative agent model analyzed inWon(2008), which may provide a rationale for using a rather simplerrepresentative agent model.