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Merits of Devaluation of The Currency. Mechanism of correcting deficits - Assignment Example

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Following research will focus on the merits and demerits for country when it devalues its currency. There are several factors responsible for the changes in exchange rate and there are several policy objectives behind such changes. …
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Merits of Devaluation of The Currency. Mechanism of correcting deficits
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Download file to see previous pages UK suffered a huge current account deficit in 2008, as high as 3% of its GDP. Later the deficit was corrected with proper implication of currency devaluation (Pettinger 2009). 2. Mechanism of sustainable investment. Devaluation requires a higher amount of domestic currency for any foreign transaction. This makes it difficult for existing investors of country to switch or transfer their investment from the country that has devalued its currency. Because switching investment to foreign country may worth considerably lesser as compared to the current worth of investment. This will make the existing investors less likely to switch their investment. Hence devaluation ensures sustenance of existing investment in the country. 3. Mechanism of economic growth As mentioned earlier, devaluation of country’s currency results in the soaring of exports and aggregate demand of country’s goods and services. This is likely to result in economic growth of the country at higher rates. 4. Increase in flow of capital A devaluing country facilitates foreign investors in terms of its now relative cheap labor and a country that will stimulate demand, due to its strong export potential, due to devaluation. Hence devaluation provides motivation of higher profitability o the foreign investors and this is likely to result in the increase of capital flow in the devaluing country. China has long been having a devalued currency. China has become home to many manufacturing firms due its export facilitations and inexpensive production. It is mainly due to Chinese devalue exchange rate (News n economics 2010) Demerits of Devaluation of Currency 1. Increase in...
It is evident from the study that devaluation is largely believed to correct the trade deficit and balance of payment deficit. Decrease in exchange rate of a country’s currency will render its products and services relatively cheaper for foreign buyers. This is likely to increase demand for country’s goods in foreign market and hence its exports will increase. Moreover devaluation will make foreign goods relatively dearer for domestic buyers and their demand is likely to decrease. This will reduce the imports in that country. Increased exports and reduced imports are likely to correct the trade deficit. This will also improve the current account deficit in Balance of payment accounts and will consequently correct the balance of payment deficit of the devaluing country. UK suffered a huge current account deficit in 2008, as high as 3% of its GDP. Later the deficit was corrected with proper implication of currency devaluation. Devaluation of currency renders imports dearer to the buyers of devaluing country. Since a country cannot produce everything, imports cannot be avoided. However if a country is supposed to import raw material for production of its certain goods it will make the cost of production higher. As a result those goods may not compete efficiently in foreign market as well as their domestic demand will decrease. Devaluation increases country’s exports. This means that it affects badly on the exports of other countries by making its goods cheaper in foreign market. ...Download file to see next pagesRead More
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