Essay Example on Fixed Exchange Rate: Devaluation/Revaluation of Currency

Introduction

Under the fix exchange rate, devaluation or revaluation of the money is the authorized change in the worth of a county's currency. In the case of the floating exchange rate, the normal market forcers determine the changes in the value of money, which are referred to as the depreciation or appreciation of the currency. In both devaluation and revaluation of currency in the fixed exchange rate, these changes are made by the relevant policymakers in the county, but it is important to note that the market pressure motivates the changes (Mariolis, 2013). The charter of the international monetary fund guides the country legislators to evade manipulation of the exchange rate in an attempt to attain a biased competitive benefit over other member countries.

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Devaluation of currency is the deliberate downward adjustment of the value of money compared to other currencies. A devaluation is a tool that is mainly used by a country's monetary authorities to improve the state's balance of trade by boosting the exports at periods when the trade deficit may be a challenge to the economy of a country (Borensztein & De Gregorio, 2015). A devaluation in the dollar means that 1 dollar is cheaper compared to other foreign monies.

After the depreciation, the same amount of foreign currency can buy a greater sum of money than before devaluation, this, in other words, means that a state's goods and services are most likely to be sold at a lower market price in the foreign market hence making them very competitive. Devaluation mostly occurs when the state realizes regular capital outflows or in other words, capital flight from the country or in instances where there is a considerable trade deficit, where the amount of imports is greater than the worth of the exports in a country. There are many circumstances under which a country might consider currency devaluation, and the devaluation can have various effects on the economy (Mariolis, 2013).

Circumstances Under Which A Country Devalues Its Currency

When a country devalues its money, it is for the reason that the interactions of the forces in the market and the country strategy decisions have made the currency's fixed exchange rate indefensible. For a state to maintain a standard exchange rate, a state ought to have adequate overseas exchange funds, dollars in most instances, and is ready to use them to make a buying of all offers of its cash as the recognized exchange rate (Borensztein & De Gregorio, 2015). In instances when the state has no sufficient foreign exchange reserve, and in case it does is not willing to spend it, then in this instance, it ought to undervalue its money to a level that it is capable and ready to support with the foreign conversation reserve.

There exist other strategy issues that may motivate a state to devalue its currency. For instance, instead of executing unpopular fiscal strategies, a state might consider devaluing its currency in an attempt to enhance the total demand in the industry, this is mainly used to fight the level of unemployment in a country.

Effects of The Depreciation of The Currency

Devaluation and Its Effects on The Balance of Trade

Lowering the value of a country's currency tends to increase the state's exports by making the goods from this state cheaper for the foreign state. This, on the other hand, makes import from other states more expensive concerning domestic currency, and this consequently decreases the import levels. With the increase in export and import decreasing, this is expected to lower the state's trade deficit (Borensztein & De Gregorio, 2015). In the last several years, it is for a fact that the states devalue their currencies when experiencing severe imbalance in the stability of trade or payment. This has the effect of increasing the export levels and lowering the import level, and this restores the republic's stability of payment to the equilibrium level.

It is also very important to note the devaluation on the equilibrium of trade is equivocal and quite ambiguous since a respectable deal rests on the price elasticity in imports and exports in a nation. For instance, if the value of elasticity of exports concerning the foreign cash in a county is lower than the unit, the price of exports concerning the foreign money will decrease as increases in the actual volume of imports will be greater to counterweight the devaluation of the money (Kalyoncu et al., 2008). On the contrary, in case the demand for the import is inelastic, it will not decline regardless of the country devaluing its currency.

Cheaper Exports

Devaluation or the fall of the dollar concerning other currencies makes a country's export more competitive, and this makes the dollar appear cheaper to foreigners. As a result, this increases the demand for export money (Kalyoncu et al., 2008).

Devaluation of The Currency Is More Likely to Cause Inflation

Devaluation of a state's currency tends to increase the cost level in a state and hence raises the degree of inflation in a state. This is due to the increase in the cost of importing goods from a foreign country in instances where the increase in the import of customer goods directly leads to the rate of inflation (Munasinghe, 2012).

In case of the increase in the import of raw materials and capital goods, the increase in the price of importing these not only increases their prices but also leads to an increase in prices for the manufacture of other goods. The rise in the import of raw materials will cost the rise in the price of manufacture of the goods and other related products hence leading to cost-push inflation.

Secondly, devaluation of the currency makes the exports cheaper, and this makes the country more competitive in the international market. Besides, this leads to an increase in exports, and these also lead to a decline in the supply and availability of goods in the domestic market, which consequently leads to an increase in the price levels domestically (Munasinghe, 2012). Also, due to an increase in the price of the good that is imported, citizens in a state tend to substitute the domestically produced goods for the expensive imported goods which benefit the local market.

Currency devaluation may also have an optimistic effect on the sales that are made by an organization to the overseas parties, irrespective of the money used. In case the organization needs payment in U.S dollars for all the exports, then the clienteles may make more purchases on the goods sold since their currency translates to extra U.S dollars.

The organizations, especially in the tourism industries, are more likely to have increased profits in the case of currency devaluation. The shops, restaurants, and other tourist-friendly sites often make export profits when the value of the dollar falls, and this is because of the overseas visitors the less expensive united states as a favorite and attractive destination financially (Borensztein & De Gregorio, 2015). This means that they can have extra cash when they convert their currency into U.S dollars.

Improvement in The Current Account

With a country's exports being more competitive and the import being significantly expensive, a county is more likely to experience increased exports and decreased import, which in turn reduces the current account defi9cit, and this makes a devaluation necessary to reduce the size of the deficit (Munasinghe, 2012).

Wages

A devaluation in the dollar makes the united states less attractive to foreign workers. For instance, the fall in the value of the dollar, migrant workers from Mexico may prefer working in other states such as the United Kingdom or Germany than the united states. In the united states food manufacturing industry, a large number of workers are immigrants. The united state organizations might have to push up the wages to keep foreign labor.

The Decrease in Real Wage

In the period of wage stagnation, a devaluation can lead to a fall in real wages (Munasinghe, 2012). The reason is that devaluations cause a state to experience a higher inflation level; however, if the inflation level is higher than the wage increase, then real wages in the country will fall.

Conclusion

Devaluation of a country's currency can have both positive and negative impacts on the organ8sation in the economy and the general economy entirely. It is also very important to note that by devaluing the country's currency can have adheres to the economy. This can happen if the country devalues its currency, and other countries retaliate by doing the same or imposing tariffs on goods imported from the devaluing country. The role of the IMF is to make sure that countries do not gain a competitive edge at the expense of other countries using unfair competitive tools such as currency devaluation.

References

Borensztein, E., & De Gregorio, J. (2015). Devaluation and inflation after currency crises. International Monetary Fund. https://www.investopedia.com/articles/economics/08/currency-crises.asp

Kalyoncu, H., Artan, S., Tezekici, S., & Ozturk, I. (2008). Currency devaluation and output growth: empirical evidence from OECD countries. International Research Journal of Finance and Economics, 14(2), 232-238. https://www.researchgate.net/publication/310773973_Devaluation_and_Output_Growth_Evidence_from_Pakistan

Mariolis, T. (2013). Currency devaluation, external finance, and economic growth: A note on the Greek case. Social Cohesion and Development, 8(1), 59-64. DOI: 10.12681/scad.9089

Munasinghe, M. (2012). Making economic growth more sustainable. Ecological Economics, 15(2), 121-124. DOI: 10.1016/S0921-8009(03)00162-9