Beruflich Dokumente
Kultur Dokumente
devaluation
Tejvan Pettinger February 10, 2013 economics
Advantages of devaluation
1.
Exports become cheaper and more competitive to foreign buyers. Therefore, this
provides a boost for domestic demand and could lead to job creation in the export sector.
2.
Higher level of exports should lead to an improvement in the current account deficit. This
is important if the country has a large current account deficit due to a lack of competitiveness.
3.
Higher exports and aggregate demand (AD) can lead to higher rates of economic growth.
Disadvantages of devaluation
1. Is likely to cause inflation because:
Imports more expensive (any imported good or raw material will increase in price)
Firms / exporters have less incentive to cut costs because they can rely on the
devaluation to improve competitiveness. The concern is in the long-term devaluation may lead to
lower productivity because of the decline in incentives.
2. Reduces the purchasing power of citizens abroad. e.g. more expensive to go on holiday
abroad.
3. A large and rapid devaluation may scare off international investors. It makes investors less
willing to hold government debt because it is effectively reducing the value of their holdings.
4. If consumers have debts, e.g. mortgages in foreign currency after a devaluation they will see
a sharp rise in the cost of their debt repayments. This occurred in Hungary when many had taken
out a mortgage in foreign currency.
The state of business cycle In a recession a devaluation can help boost growth without
causing inflation. In a boom a devaluation is more likely to cause inflation.
Elasticity of demand. A devaluation may take a while to improve current account because
demand is inelastic in the short term.
If the country has lost competitiveness in a fixed exchange rate, a devaluation could be
beneficial in solving that decline in competitiveness.
MEANING OF DEVALUATION :
It means to depreciate the value of domestic currency interms of foreign currencies. For example the rate
of exchange between India U.S.A. is 35 Rs. = 1 Dollar. If India readjusts the exchange rate and offers Rs.
45 = 1 Dollar. The Indian currency will be said to have been devalued or depreciated.
OBJECTIVES OF DEVALUATION :
Almost all the countries of the world have devalued their currencies time to time to achieve certain
economic objectives. During great depression of 1930 most of the countries devalued their currencies.
2. To Discourage The Imports :As the currency of any country is devalued the other countries goods becomes costly to import from that
country. So the people reduce their demands for foreign goods.
3. To Correct The Balance Of Payment :When the balance of payment of any country is unfavorable the devaluation policy is adopted. When the
currency is devalued, the value of imports increases but the value of exports will be greater then the value
of imports, we will say that balance of payment is favourable.
Correction Of Deficit :Devaluation makes home goods cheaper to foreign countries and foreign goods expensive to
home country. In this way deficit in the balance of payment is corrected.
2. Adjustment Of Currency Value :When the currency is over valued, devaluation brings equilibrium in the external and internal
value of the currency. So various imbalances in the economy removes.
3. Increase In Foreign Aid :The international lending agencies like IMF, IBRD insists upon devaluation, specially to under
developed countries like India, Pakistan etc. Foreign investor also feels pleasure to do the
investment in those countries where currency is devalued.
4. End Of Uncertainty :Devaluation removes the uncertainty in the business circles. Rate of investment alsi increases.
5. Inflow Of Remittances :The workers who are working abroad they would prefer to send capital in side the country.
Because they will get more currency in terms of foreign currency.