...Assignment Currency Devaluation Introduction Devaluation refers to a decrease in a currency's value. A currency devalues when its value declines in relation to one or more other currencies. It affects the demand for exports and imports. Currency devaluation is evaluated in terms of the foreign exchange rate. Exchange rate is the value between two currencies shows how much one currency is worth in terms of other currency. The depth and intensity of exchange rate volatility and its impact on the volume of international trade was recognized during 1970s when the world economy shifted from fixed exchange rate to free floating exchange rate. If the exchange rate volatility is higher, then it will generate uncertainty of the future profit from export trade. In this assignment we will discuss on such issues like exchange rate volatility I addition to currency devaluation and its impact on the volume of international trade of developing country focusing Bangladesh. This assignment is based on the exchange rate and its volatility in addition to devaluation that affect on the on international trade of Bangladesh. The concept of the study is taken from the academic activity of ECN-201 course instructed by Mrs. Nahid ferdousi, lecturer of Department of Business Administration of University of Asia Pacific. This paper consists of three parts. In first part we will give a short description of currency valuation and factors that affects the currency valuation, and then we animated...
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...Devaluation in modern monetary policy is a reduction in the value of money with a respect to those goods, services or other monetary units with which that currency can be exchanged. ‘Devaluation’ means official lowering of the value of a country's currency within a fixed exchange rate system, by which the monetary authority formally sets a new fixed rate with respect to a foreign reference currency. There many reasons for devaluation, and but most have severe consequences that do more harm than good. One of the main reasons a country devalues its currency is to increase its ability to bring in production from the outside and boost its own labor and development. When outside currencies are much stronger, a country can attract international business with cheaper production and labor costs by having a lower valued currency. Alternatively, a country may want to recover its currency from overseas holders. By devaluing the currency it becomes worth less and cheaper to buy back. They country can then re-inflate the value again over time to bring it back to its original state, however it’s no longer sitting overseas. Finally, a country may want to devalue its currency to pay off international debt. If its original loans were made in the same currency, the country could devalue the monetary value by printing more to then pay off the loan faster. This approach gets the borrow The fastest way to devalue a currency is through inflation. When inflation occurs, it takes more currency...
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...Assignment Yuan Devaluation Group 2 Group Members Kouadio Dieudonne XPGDM-18 Rohit Khandelwal XPGDM-28 Shruti Tibrewal XPGDM-32 COUNTRY AT A GLANCE Population | 1.364 billion | 2014 | GDP | $10.35 trillion | 2014 | GDP growth | 7.3% | 2014 | Inflation | 2.0% | 2014 | CHINA Economic Overview The Chinese economy experienced astonishing growth in the last few decades that catapulted the country to become the world's second largest economy. In 1978—when China started the program of economic reforms—the country ranked ninth in nominal gross domestic product (GDP) with USD 214 billion; 35 years later it jumped up to second place with a nominal GDP of USD 9.2 trillion. Since the introduction of the economic reforms in 1978, China has become the world’s manufacturing hub, where the secondary sector (comprising industry and construction) represented the largest share of GDP. However, in recent years, China’s modernization propelled the tertiary sector and, in 2013, it became the largest category of GDP with a share of 46.1%, while the secondary sector still accounted for a sizeable 45.0% of the country’s total output. Meanwhile, the primary sector’s weight in GDP has shrunk dramatically since the country opened to the world. China weathered the global economic crisis better than most other countries. In November 2008, the State Council unveiled a CNY 4.0 trillion (USD 585 billion) stimulus package in an attempt to shield the country from the worst effects...
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...Definition: Balance of payments (BOP) accounts are an accounting record of all monetary transactions between a country and all other countries of the world. These transactions include payments for the country's exports and imports of goods, services, financial capital, and financial transfers. The BoP accounts summarize international transactions for a specific period, usually a year, and are prepared in a single currency, typically the domestic currency for the country concerned. Sources of funds for a nation, such as exports or the receipts of loans and investments, are recorded as positive or surplus items. Uses of funds, such as for imports or to invest in foreign countries, are recorded as negative or deficit items. Britannica Concise Encyclopedia: Systematic record of all economic transactions during a given period between residents (including the government) of one country and residents (including the governments) of other countries. The transactions are presented in the form of double-entry bookkeeping. Barron's Banking Dictionary: Accounting of a country's economic transactions with foreign countries in a stated period of time, normally one year. The balance of payments for any country is divided into two broad categories: the Current Account representing import and export trade, plus income from tourism, profits earned overseas, and interest payments; and the capital account, representing the sum of bank deposits, investments by private investors, and debt securities...
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...several impacts of currency devaluation and revaluation on international trade. Before I begin to provide the impacts I will first define devaluation and revaluation. Zaiby (2008) says that devaluation occurs when a nation decreases the value of their currency to match the value of gold or other countries; it can be seen as a means to correcting a deficit that is interchangeably with depreciation through values of money supply and demand (para. 2). Critics believe that devaluating the value of a dollar might be beneficial to an economy; because a lower dollar value, which in turn enhances manufacturing production, boost employment and improve and sustain economic growth of a nation (McConnell, Brue and Flynn, 2015). On the other hand, other critics view it as a dangerous game to play, which the country will possible lose investors or will never gain another investor (McConnell, Brue and Flynn, 2015). In addition, the country will have financial issues, trade deficits, increased interest rates and may see a recession. This process of devaluation can save an economy to sustain economic growth; therefore, several impacts come to mind relating to devaluation. They include export stimulation on merchandise, discouraging imports on merchandise, illegal leakages on foreign exchange, debt and debt service liability burdens on foreign payments and loans, budget deficits cost-price relationship issues and an inflation (McConnell, Brue and Flynn, 2015).. The good news is that most...
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... Exchange Rate Exchange rate between two currencies is the rate at which one currency will be exchanged for another. How to calculate exchange rate Each country manages the value of its currency through varying mechanisms. The currency can either be free-floating or fixed. 1. Movable or Adjusted Peg System A system of fixed exchange rates, but with a provision for the revaluation (usually devaluation) of a currency. E.g. Between 1994 and 2005, the Chinese Yuan renminbi (RMB) was pegged to the United States dollar at RMB 8.2768 to $1. 2. Free Floating System In this system the exchange rate is allowed to vary against that of other currencies. It is...
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...follows :- 1. Deflation Deflation means falling prices. Deflation has been used as a measure to correct deficit disequilibrium. A country faces deficit when its imports exceeds exports. Deflation is brought through monetary measures like bank rate policy, open market operations, etc or through fiscal measures like higher taxation, reduction in public expenditure, etc. Deflation would make our items cheaper in foreign market resulting a rise in our exports. At the same time the demands for imports fall due to higher taxation and reduced income. This would built a favourable atmosphere in the balance of payment position. However Deflation can be successful when the exchange rate remains fixed. 2. Exchange Depreciation Exchange depreciation means decline in the rate of exchange of domestic currency in terms of foreign currency. This device implies that a country has adopted a flexible exchange rate policy. Suppose the rate of exchange between Indian rupee and US dollar is $1 = Rs. 40. If India experiences an adverse balance of payments with regard to U.S.A, the Indian demand for US dollar will rise. The price of dollar in terms of rupee will rise. Hence, dollar will appreciate in external value and rupee will depreciate in external value. The new rate of exchange may be say $1 = Rs. 50. This means 25% exchange depreciation of the Indian currency. Exchange depreciation will stimulate exports and...
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...(iv) Your country is in a recession. You feel that a policy of exchange rate depreciation will stimulate aggregate demand and bring the country out of the recession. This essay examines the effectiveness of using exchange rate depreciation to stimulate aggregate demand in order to bring a fictional country, Australand, out of recession. It will explain how a policy of exchange rate depreciation can increase aggregate demand and how this will stimulate economic activity and bring Australand out of recession. The process of depreciating the currency will be explained as well as possible ramifications of this policy. Alternative options to increase aggregate demand will also be explored. A recession is technically when an economy has experienced two successive quarters of negative gross domestic product (GDP) growth. For this to happen the total amount of goods and services produced by a country must contract on a quarter by quarter basis for six months or more. (http://news.bbc.co.uk/2/hi/business/7495340.stm) It therefore stands to reason that by increasing the total amount of goods and services Australand produces, known as aggregate output, will bring Australand out of recession. Blanchard and Sheen (2009 p39) state that in the short run the main determinent of aggregate output is demand and that changes in demand can lead to an increase in output. Aggregate demand is the total quantity demanded for output at a given price level and it is therefore necessary to...
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...Almost-Free Lunch? • The large devaluations experienced by Korea, Malaysia, Thailand, and Indonesia beginning in the summer of 1997 raised concerns that imports from these countries would soar while demand for U.S. exports weakened, causing U.S. industries to suffer. W • As it turned out, manufactured imports from the four countries rose only slightly, and the decline in U.S. exports was not large enough to have a significant effect on trend output for most industries. • The one exception to this pattern was the steel industry: there, sharply rising imports and falling exports led to a drop in output and prices. • Overall, the United States enjoyed an “almost-free lunch” in the wake of the Asia crisis. Cheaper imports benefited consumers, and domestic production and employment were largely unhurt. hen the Asia crisis erupted in the summer of 1997, many forecasters predicted that one effect would be an end to the economic boom in the United States. Surely, it was argued, the drop in demand for U.S. exports combined with surging import volumes would finally be enough to slow the U.S. economy. It did not happen. Indeed, the Asia crisis’ overall effects on the United States were small.1 In terms of trade flows, total manufactured imports from the Asian countries affected by a currency collapse—Indonesia, Korea, Malaysia, and Thailand, which I will refer to as the “Crisis 4” countries—grew only slightly, while exports to these countries fell sharply (Chart 1).2 Although...
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...A Case Study of a Currency Crisis: The Russian Default of 1998 Abbigail J. Chiodo and Michael T. Owyang currency crisis can be defined as a speculative attack on a country’s currency that can result in a forced devaluation and possible debt default. One example of a currency crisis occurred in Russia in 1998 and led to the devaluation of the ruble and the default on public and private debt.1 Currency crises such as Russia’s are often thought to emerge from a variety of economic conditions, such as large deficits and low foreign reserves. They sometimes appear to be triggered by similar crises nearby, although the spillover from these contagious crises does not infect all neighboring economies—only those vulnerable to a crisis themselves. In this paper, we examine the conditions under which an economy can become vulnerable to a currency crisis. We review three models of currency crises, paying particular attention to the events leading up to a speculative attack, including expectations of possible fiscal and monetary responses to impending crises. Specifically, we discuss the symptoms exhibited by Russia prior to the devaluation of the ruble. In addition, we review the measures that were undertaken to avoid the crisis and explain why those steps may have, in fact, hastened the devaluation. The following section reviews the three generations of currency crisis models and summarizes the conditions under which a country becomes vulnerable to speculative attack. The third section...
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...exchange rate policy of Sri Lanka in achieving external competitiveness since liberalization of the economy in 1977. The conventional two-country trade model that explains the traditional approach to Balance of Payment (BOP) was applied using quarterly data covering the period of 1978:1 to 2000:4. Results reveal that the Real Effective Exchange Rate(REER) does not have significant impact on improving the Trade Balance (TB) particularly in the short run implying a blurred J-Curve phenomenon. Even though the cointegration tests reveal that there is a long run relationship between TB and the REER it shows very marginal impact in improving TB in long run. (JEL F40, O24) I. Introduction The exchange rate is the price of national currency in terms of foreign currency. The close linkage of the exchange rate to the general price levels of the economies produce an economy wide importance of policy making since it affects the real income and wealth of those economies. One of the major objectives of the exchange rate based stabilizations is to improve the Balance of Payment (BOP) performance through international competitiveness. Countries have been using this strategy for a considerable period of time producing varying results. The empirical observations reveal that some countries were successful in following the particular strategy while some countries producing disastrous results. Under these circumstances the obvious question that has to be answered is “ What are the reasons for producing...
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...an rupee AN ASSIGNMENT ON FLUCTUATIONS IN INDIAN CURRENCY AND ITS IMPACTS SUBMITTED TO: Professor Harshit Shah SUBMITTED BY: Amber A Maheshwari (NR12070) SUBMITTED ON: 19th September 2013 INTRODUCTION TO EXCHANGE RATE MECHANISM: All economies that interact with international economy can be broadly classified into three categories on the basis of exchange rate policy of the country. 1) FIXED EXCHANGE RATE: These economies peg the value of their currency with some other prominent currency like US dollar. This system is simple and provides stability to the economy (of course, if the economy of the country to whose currency its currency is pegged is stable). This type of exchange rate regime is maintained by generally smaller economies like Nepal and Bhutan (pegged to Indian Rupee) or several African nations. Rational behind such regime is that in case of small economy – if the exchange rate is market determined – the sudden influx or out flux of even relatively small amount of foreign capital will have large impact on exchange rate and cause instability to its economy. Notable exception is China which despite being large economy has its currency pegged to US dollar. 2) FLOATING (OR FREE) EXCHANGE RATE: Bigger and developed economies like US, UK, Japan etc generally let market determine their exchange rate. In such economy exchange rate is determined by demand and supply of the currency. For example consider exchange rate of US dollar versus Japanese Yen...
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...Latvia: Navigating the Strait of Messina | | Introduction This report indicates the history of Latvia country and the transition period of independency and the shifting to market economy. The country growth was very fast until 2008. In December 2008, facing the possibility of financial collapse and a currency crisis, they asked for a rescue and they received a $10.5 billion package funded by the International Monetary Fund (IMF), World Bank, EU, and several countries in the region. After that, it talks about the possibility that could help Latvia to restore a sustainable growth. Which are either Devalue the national currency or maintain the peg and attempt an “internal devaluation”. Executive Summary 1. To study economic adjustment under a fixed exchange rate system 1. Explore the meaning of a "sudden stop" in capital flows and causes of Latvia's economic boom and busts. 2. Assess the tradeoffs involved in internal and external devaluation in the Eurozone. 3. Consider historical, political, economic, and other factors that influenced Latvia's policy decisions and their outcomes. 4. Predict the long-term impact of Latvia's policy decisions during the crisis. Contents Introduction 1 Executive Summary 2 Analysis 4 Analysis 1) Historical, political, economic, and other factors that influenced Latvia's policy decisions and their outcomes (Learning objective# 5) | 2) Problems and the crisis and its causes...
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...Finance 190 Professor Shlyakhov 10/21/2013 Asian Currency Crisis The Asian Currency Crisis started in Thailand. The crisis just reflected structural and policy misinterpretation of the Asian region. Fundamental imbalances triggered the currency and financial crisis in 1997, due to crisis markets overreaction and herding caused the plunge of exchange rates, asset prices and economic conditions. Everything started from Thailand, before 1997 the economy grew was very high in Thailand, it was averaging 9% per year. The rate between USD and Baht was $25 per 1 baht. The 1997 was crucial for Thailand because massive speculators attacked Thai baht. The spark on Asian crisis was when prime minister of Thailand announced that he would not devalue the baht, and government just couldn’t defend baht, which was fixed to several currencies, one of the dominant components was USD. The decrease in economy of Thailand cause massive layoffs in finance, real estate, and construction that resulted many people to return their villages and countries. The Thailand baht was devaluating and by 1998 it reached lowest value of 58 baht over 1 USD. Without any support from foreign reserves Thai government had to float the baht, so that way baht was set on currency market. Since baht was pegged to other currencies crisis spread to another Asian countries. By 2001, Thailand's economy had recovered. The increasing tax revenues allowed the country to balance its budget and repay its debts to the IMF in...
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...long-standing interest in studying the factors that are responsible for uneven vacillation in the stable growth of the world economies. Lots and lots of theoretical literature and empirical evidences have addresses this issue in the past. Hike in prices of goods and services and foreign exchange are two important aspects which are deemed responsible for such potholed fluctuations in the economic growthThe volatility of the nature of prices is a major source of concern in all countries since 1970s. The issue is of a more serious nature in the developing countries where inflation in foreign countries known as “imported inflation” is seen to be driving “local/domestic inflation”; making domestic policies to control inflation ineffective. Similarly, in Pakistan, the domestic price level rose from the mid-1970s. The exchange rate started depreciating continuously from the early 1980s. Continuous devaluation of currency and inflation in the 1980s seems to suggest a correlation between the two variables.The studies by Rana and Dowling (1983) suggest that foreign inflation is the most influencing factor in explaining the change in local price level in nine less-developed countries of Asia during the period 1973-79. This study suggests that these countries cannot exercise much control over domestic inflation, however, the policies of their major trading partners (through exchange rate) had a significant impact on their domestic prices. Cooper (1971) and Krugman and Taylor (1978) have also studies...
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