Devaluation, Open Economy, global economy
Over the years, the global economy has undergone massive transformation emerging from the desire to run the national economies under financial strength arising from the expanding international trade. Ordinarily, the international trade demand use of foreign exchange to leverage the absence of a common currency across the globe, which may derail and hold the international transactions at ransom. Consequently, everyday international operations are facilitated through the continual purchasing and selling of different currencies. Alike other economic transactions, currency exchange is affected by supply and demand factors influenced by export-import transactions highlighting how respective buyers and sellers execute their deals at different prices (Hollander, 2011 , p. 11).
Noteworthy, though the global economy has long shifted from the fixed exchange systems to adopt the flexible systems, the current drive to
conform to demand and supply upholds the former exchange system. Differently, only now that the government through its central bank intervene by lowering the associated value of the currency in a bid to sustain and control the exchange rates causing economic conflict as the market forces influence otherwise.
[...] This eases the process of servicing a country's external debt burden that has often scraped off the trading benefits in major economies. Evidently, most economies around the world are tempted to initiate devaluation of their currencies unnaturally, aiming to profit from encouraging lower exports while discouraging importations. However, despite undertaking currency devaluation, the country may suffer 6 adversely from mushrooming import prices and costly overseas transactions. In particular, the biggest threat causing global trade imbalances emerge from currency devaluation implemented to boost the Chinese exports affecting the competitiveness of other countries' exports. [...]
[...] Also, where currency devaluation causes inflation, the national economy is locked in hyper-stagflation evident in rising unemployment rate since it is unfeasible for the manufacturing units to sustain their large workforce given the prevailing 7 wages (Hollingsworth p. 138; Blanchard, Amighini, & Giavazzi p. 396). Lastly, implementing devaluation is a sign of economic weakness which adversely affects the creditworthiness across the economy. This erodes the investor confidence as prospective investors are sceptical about the economy's future prospects, often leading to capital flight in a massive withdrawal of Foreign Institutional Investments and Foreign Direct Investments (Mehta para 20). [...]
[...] Simultaneously, this makes the imports from such partners more costly in the domestic market of the country effecting devaluation and thereby boosting the economy. Secondly, when other trading partners fail to follow suit in reprisal versions of devaluation, sustaining the currency at a lower value than the market forces accord, guarantees higher levels of exports; consequently translating into sessions of improving the deficit previously existing in the current account. For instance, this was integral in the case of the United Kingdom, who has a large current account deficit summing into over of GDP in 2008 (Pettinger para 2). [...]
[...] Retrieved August from http://www.buzzle.com/articles/how-does-currency-devaluation-work.html Pettinger, T. (2009, February 10). Advantages and Disadavantages of Currency Devaluation. Retrieved August from http://www.economicshelp.org/blog/1299/economics/advantages-and-disadvantages-ofdevaluation/ 9 Yotopoulos, P., & Romano, D. (2007 The Asymmetries of Globalization. New York: Taylor & Francis. [...]
[...] Similarly, developing economies face a periodical currency crisis prompting devaluations in instances when the country faces prolonged trade deficits, successive budget deficits and slack demand of the currency following internal weaknesses (Edwards & Frankel p. 560). Technically, the likely factor leading to devaluation is the existence of foreign exchange rate 4 controls in the interests of upholding economic stability. Lastly, devaluation may ensue from an epidemic of currency substitution as a remedy of the macro-fundamentals, resulting in further distortion affecting the allocation of economic resources by inducing misallocations in favour of the tradable sectors (Yotopoulos & Romano p. [...]
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