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Devaluation in Open Economy

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Daniel V.
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  1. Introduction
  2. Implementing devaluation in the economy
  3. Implications of Devaluation
  4. Conclusion

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). [...]


[...] The Depreciating Dollar: Economic Effects and Policy Response. Retrieved August from http://www.fas.org/sgp/crs/misc/RL34582.pdf Hollander, B. G. (2011 How Currency Devaluation Works. New York: The Rosen Publishing Group. Hollingsworth, D. A. (2007). The Rise, the Fall, and the Recovery of Southeast Asia's Minidragons: How Can Their History be Lessons We Shall Learn During the Twentyfirst Century and Beyond? Lanham: Lexington Books. Mehta, F. (2011, July 9). How Does Currency Devaluation Work? [...]


[...] 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 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. [...]

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