...Currency devaluation is good for a country In the recent year, the global financial crisis is more increasingly serious and many countries have become a victim. Consequently, currency devaluation is a considerable option to improve the status quo. Devaluation is viewed as a method of improving a country's "competitiveness", or in other words rendering domestically produces goods more attractive abroad while making foreign produced goods less attractive at home (Miles 1978, introduction 2). Supply-and-demand forces determine the exchange value of a currency in exchange markets which are fundamentally the result of the debit and credit items in the balance of payments (Gilbert 1979, 112). Historically, an issuing authority who certified the weight and purity of the precious metal published the early currencies--coins. A government in need of short on precious metal might abruptly lower the weight and purity of coins to devaluate the currency (from Wikipedia). After the Second World War, currency devaluation is a means as a counter-economic crisis and stimulates the development of economic in many countries. When a country face the balance of payments deficit, the strategy of local currency devaluation can be changed previous condition through the decrease of the currency exchange rate, which seems an advisable way to reduce the deviation of prices and to resume the contribution margin ration of exports commodities. Earlier devaluations are characterized by weak fundamentals,...
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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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...1994-1995 What Caused Mexico’s peso crisis of December 1994? Mexico, the Latin American country that survived the huge debt crisis in the 1980’s found itself amidst one of the most viral economic crises that it had ever encountered in its history. The crisis took place under President Zedillo; however, the causes of the crisis are usually linked to Carlos Salinas de Gortari and his outgoing administration. Gortari’s government currency policy put an unbelievable strain on the nation’s finances. In the early 1990’s, Mexico seemed to have established itself as a reformer and was establishing economic development. Domestic deregulation and privatization combined with liberalization of trade and investment led to rapid growth and massive inflow of direct and foreign investments. By May 1994 Mexico falsely believed that there was prosperity in the nation and that it in fact could be a first world nation. The Banks were just lending credit without conducting proper checks or having any accountability and it was widely known that the currency was overvalued and there was economic mismanagement taking place. The situation was not helped and led to a collapse in confidence by several political shocks that took place like the uprising in the South and the assassination of the leading presidential candidate (Gil-Diaz, the CATO journal vol.17 no 3). The government’s corruption caused the increased account deficit fostered by consumer binding and government spending alarmed the...
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...Financial Markets & Institutions Group 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...
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...After reading this week’s material, it became a little easier to understand 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...
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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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... 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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...1.0 Summary of the article It is not surprise to everyone that China has a major role in the global economy since its economic growth has moves the country into the ranks of middle income countries. Unfortunately, issues that China faced in most recently are whether it can contribute to the vigour of the worldwide economy and manage its internal stability. China's economy is now weakening and its GDP is perhaps below the government target of 7%. Investment sentiment is the weakest indicator, while the production level in China's industries has dropped which left surplus production capacity in the industries. Although China growth is slowing down, the probability that it will collapse suddenly is small. 2.0 Discussion The biggest problem in China is that the massive debt explosion is now threatening its entire economy, leading to a reduction in capital investment. There has been a boom in the Chinese stock market, yet buying share with borrowed money had magnified the fall when companies with huge debt begin to sell their investments to pay debts (Walker, 2015). Shanghai Composite Index decreased about 8.5% in August followed by China economy downturn which perhaps was the biggest decrease since 2007 (McHugh, 2015). Overreaction in Chinese market then affect the world such as Japan's Nikkei index had slipped by 4.6%, while the Eurofirst 300 index has had its worst day since 2009 (Matthews, 2015). However, falling of stock markets in itself will not cumber the global economy...
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...Dzhalil Atakeev 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...
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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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...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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... MARKETS | | 6/9/2015 | | HISTORY In 1775, when the colonists were preparing to go to war with the British, the Continental Congress introduced the Continental currency. However, the currency did not last long as there was insufficient financial backing and the notes were easily counterfeited. Congress then chartered the first national bank in Philadelphia - the Bank of North America - to help with the government's finances. The dollar was chosen to become the monetary unit for the USA in 1785. The Coinage Act of 1792 helped put together an organized monetary system that introduced coinage in gold, silver, and copper. Paper notes or greenbacks were introduced into the system in 1861 to help finance the Civil War. The paper notes used several different techniques including a Treasury seal and engraved signatures to help diminish counterfeiting. In 1863, Congress put together the national banking system that granted the US Treasury permission to oversee the issuance of National Bank notes. CHANGES The Federal Reserve Note The Federal Reserve Board created a new currency called the Federal Reserve Note. The first federal note was issued in the form of a ten dollar bill in 1914. In order to lower the manufacturing costs of the currency by reducing the actual size of the notes by 30%, the same designs were also printed on all dominations instead of individual designs. The designs of the notes were not changed until 1996, when a series of...
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...Great mistakes in currency exchange system in Iran Foreign exchange rates is a key point in good performance of economic system in each country. Currency exchange rates is a key variable in regulating incoming and outgoing of capital, importing and exporting goods in an economy. Exchange rates is one of the most important factors in maintaining competition potentials of a country in international markets and as a result, non-oil exportation of the country, and an important factor for being independent from oil export. More even that these, exchange rates is an effective factor in maintaining competitive domestic producers against importing foreign goods flood, goods that mostly resourcing from oil export price. Every economist well knows that specifying currency rates has a determinant role in maintaining the stability, mobility, economic growth and development of the country. So, even a small mistake in determining currency exchange rate leads to great costs and losses for the country. Unfortunately, Iranian politicians and their economic advisors have made great mistakes in the guidance and regulation of foreign exchange rate as they made mistake in many other economy key variables. This is either due to lack of right intelligence regarding currency exchange and its impressions on economy, which comes from great theoretical mistakes, or due to political preference rationality against economics rationality which is the result of different political pressures. Anyway, regardless...
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...East Asian Crisis Financial crisis is a situation in which some financial institutions or assets suddenly lose a large part of their value. East Asian crisis was a series of currency devaluations and other events that spread through many East Asian countries beginning in the summer of 1997. The countries majorly affected by this were: 1. 2. 3. 4. 5. 6. South Korea Japan Thailand Indonesia Malaysia Philippines The countries at the center of the recent crisis were for years admired as some of the most successful emerging market economies, owing to their rapid growth and the striking gains in their populations' living standards. With their generally prudent fiscal policies and high rates of private saving, they were widely seen as models for many other countries. No one could have foreseen that these countries could suddenly become embroiled in one of the worst financial crises. Their very success led foreign investors to underestimate their underlying economic weaknesses. Partly because of the large-scale financial inflows that their economic success encouraged, there were also increased demands on policies and institutions, especially those safeguarding the financial sector; and policies and institutions failed to keep pace with these demands. Only as the crisis deepened were the fundamental policy shortcomings and their consequences fully revealed. Also, past successes may have led policymakers to deny the need for action when problems first appeared1. Several factors contributed...
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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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