• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

Devaluation By Rughoobar Chidanand

Extracts from this document...

Introduction

Devaluation I. Introduction Devaluation, in economics, official act reducing the exchange rate at which one currency is exchanged for another in international currency markets. A government may choose to devalue its currency when a chronic imbalance exists in its balance of trade or overall balance of payments, which weakens the international acceptance of the currency as legal tender. The lowering of a currency value by devaluation occurs when a country has been maintaining a fixed exchange rate relative to other major foreign currencies. When a flexible exchange rate is maintained-that is, currency values are not fixed but are set by market forces-a decline in a currency's value is known as a depreciation. II. Causes The free-market value of a national currency is determined by the interaction of supply and demand. If the quantity of the currency demanded is greater than the quantity supplied, a nation will experience a balance of payments surplus. A balance of payments deficit exists when the quantity of currency supplied is greater than that in demand. ...read more.

Middle

III. Effects Currency devaluation primarily affects a nation's trade balance, which is the difference between the value of its exports and that of its imports. Devaluation reduces the value of a nation's currency in terms of other currencies; thus, following a devaluation, a nation will have to exchange more of its own currency in order to obtain a given amount of foreign currency. This causes the price of imports to rise and makes domestic products more attractive to consumers at home. Because it takes less foreign currency to buy a given amount of a devalued currency, the price of the nation's exports declines, making them more desirable to foreign consumers. Depending on consumer and producer responsiveness to price changes (known as supply and demand elasticities), an effective devaluation should reduce a nation's imports and raise world demand for its exports. Improvement in a country's balance of trade will cause an increase in the new inflow of foreign currency; this, in turn, may help strengthen a country's overall balance of payments account. ...read more.

Conclusion

An agreement was also reached to set upper and lower limits within which exchange-rate fluctuations were permitted in response to market conditions. At the time of the conference this limit was set by the IMF at 1 per cent in either direction. If a country chose to adjust the value of its currency beyond 1 per cent, the nation would have to change its currency value officially in terms of US dollars. Although the Bretton Woods agreement enabled countries to raise their currency values, in practice almost all currency changes since then have been devaluations. The British pound sterling, for example, was devalued in 1949 and again in 1967. In the years following the Bretton Woods agreement, the US dollar emerged as the world's leading currency. It was used as an alternative to gold when handling international payment imbalances. In a sense the US dollar functioned as the world's money because it served as a unit of account, a medium of exchange, and a store of value. Other nations kept large proportions of their international monetary reserves in dollars. ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our GCSE Economy & Economics section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Here's what a teacher thought of this essay

5 star(s)

*****
This essay is excellent as far as it goes. Fixed exchange rates are unlikely to return in the forseeable future so I would have preferred to see more discussion of the floating exchange rate situation.

Marked by teacher David Salter 21/03/2012

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related GCSE Economy & Economics essays

  1. Main characteristics of free market economy

    order for every citizen to afford the good, every citizen to have the right of employment and wages are set by the government rather than by separate firms. Centrally Planned Economy's were primarily a feature of "communist" countries mostly located i Eastern Europe (Soviet Union).

  2. Economics - Classical School of Thought, Keynesian School of Thought, Supply Side School of ...

    Therefore it and take care of it, so the main role of government is are therefore to ensure free workings of markets forces using '"supply side policies' " and to maintain have a balanced budget. The three main theories used to that justify this view arewere: 1)

  1. What is the economic system?How does Australia's economic system attempts to solve the economic ...

    The level of control that the government assumes within a mixed economy leads to the government having a major role in the delivery of its own services. At the same time, the private sector will have an important role in helping to build government infrastructure to deliver these services.

  2. Discuss the policy options the Australian Government can use to achieve external stability

    Moreover, in some cases it is important to take into account large one-off purchases, especially if we are just looking at the CAD result for one three month period, like Qantas's purchase of Boeing 747's in the December 2002 quarter.

  1. Goodrich-RabobankInterest Rate Swap:

    Note: The reason that Salomon were confident that this could be done is described as follows: 1. There was a recent deregulation of deposit markets had allowed deposit institutions to offer new variable rate money market deposit accounts. 2. As result of these new offerings large thrift institutions Rabobank: Rabobank had AAA debt ratings, and assets exceeding $42.0 billion.

  2. What are the important elements of International Trade

    lubricants including oil, and semi-manufactured goods, such as steel bars, and then turned these into manufactured goods, some of which then get exported. Britain was a major exporter of oil up to 1985 as it made up more than 20% of their exports, but later fell back to 7% by 1991.

  1. Economic Systems - free markets and mixed economies.

    by eliminating the disadvantages of a free-market economy by adding successful and effective elements of the planned economy, such as some government intrusion and interference. An example of this is that the government will provide public and merit goods by collecting tax from the public, and relieve unemployment by creating job opportunities.

  2. Free essay

    What are the main characteristics of a free market economy and centrally planned economy?

    As a result of the free price system, the rapid increase of price will create high inflation, which was the case for the Baltic during the transition when inflation rose to 900%. This high inflation could cause a lot of inequality and more poverty as people are unable to afford the goods and services and also a fall in output.

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work