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Advantages/disadvanteges Of Currency Devaluation - Business - Nairaland

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Advantages/disadvanteges Of Currency Devaluation by Nobody: 1:39pm On Oct 16, 2015
Advantages of Currency Devaluation
1. Increasing Exports
Devalued currency makes an economy's exports more favorable. This is because their currency has become cheaper than other countries, increasing the demand from the importers.
2. Domestic Prices Remain the Same
This is one major advantage that a country can attain increasing foreign exchange reserves without affecting the domestic value of their currency, per se. The major impact of this will be felt by those who deal with imports and exports for business and
arbitragers who try to profit from small variations in different currencies. Though, devaluation in the long run does have ill-economic effects; like inflation.
3. Growth Because of Increased Money Supply
Devaluation will lead to an increased money supply in an economy, which in turn will increase aggregate consumption, demand, saving and investment. All these increments will lead to some amount of growth in an economy.
4. Balance Trade Deficits
Devaluation can be a way in which a country can discourage imports (if a country's imports are more than their exports) and balance the trade deficits by making imports more expensive.
5. Fight Unemployment
Reduced imports leads to increase in the demand for domestic goods. This increases the domestic supply of goods in an economy and which in turn increases economic activities that require more manpower; leading to increasing employment rates and reducing unemployment rates.
Disadvantages of Currency Devaluation
1. Imports Become Expensive
If a major part of an economy is dependent on imports then, devaluation can lead to major economic losses.
2. Inflation
Increased money supply, increased domestic demand can increase the prices of the domestic goods, leading to inflation.
3. Hyper-stagflation
This occurs in a situation where a currency is devalued and it results into inflation accompanied with a high unemployment rate. This is a bad situation, as the rising prices leads to further unemployment and the current wages are not sufficient to keep the employed in par with the current prices.
4. Creditworthiness Maybe Threatened
Devaluation of a currency is a sign of economic weakness, which can hamper the creditworthiness of an economy in the global market; Making it very unreliable.
5. Capital Flight
Devaluation of a currency makes the investors very skeptical about the economy's future prospects. Therefore, they would look at withdrawing their investments from Foreign Institutional Investments and Foreign Direct Investments, leading to a situation of capital flight.
Dollar Devaluation
The U.S Dollar is said to have devalued over the period from 2002 to 2009. In 2002, the U.S dollar was valued against Euro as 1 Euro=$0.86. In 2009, this ratio become 1 Euro=$1.41. A resulting effect is said to be that the number of Americans traveling to Europe have reduced and the number of European travelers traveling to America have increased during this period. Also the number of American goods bought by the Europeans have increased and the number of European goods bought by the Americans have reduced considerably.
Devaluation of a currency is definitely not a good economic indicator. A country chooses to devalue its currency only when it does not find any other option to revive and stimulate the economy again. History says that devaluation of a currency can lead massive economic set back. The policy makers need to be very cautious and sensitive while dealing with economic problems under such circumstances...
cc: lalasticlara
Re: Advantages/disadvanteges Of Currency Devaluation by madenigga2dcore(m): 8:58am On May 24, 2016
So nobody commented on this topic because it's not about sexcapades , Toto decay and yeyebrities baa? and y'all want Nigeria to move forward? Nigerians tho
Re: Advantages/disadvanteges Of Currency Devaluation by Fervante: 5:32pm On Sep 27, 2016
Stagflation i would say is what Nigeria is in now! nice write up, helped me clear my curiosity. So how would you interpret this;

"Republican presidential candidate Donald Trump says China is devaluing its currency, a policy that puts US exports at a competitive disadvantage on the global marketplace. "They're the best, the best ever at it," he said in the debate. But while the Chinese yuan has come under downward pressure as its economy slows, Beijing has actually burned through nearly $1 trillion trying to keep its exchange rate from falling. In fact, the IMF says after more than a decade of appreciating its currency, the yuan is roughly in the range that market fundamentals would suggest is fair value"

What is the relationship between exchange rate and currency value?

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