Effects of Devaluation on Companies in Uk

Topics: Foreign exchange market, Inflation, Currency Pages: 10 (3624 words) Published: April 27, 2013
Effects of devaluation of a sterling pound on business in UK Introduction
Devaluation is the reduction of a country’s currency compared to that of other countries. It makes the domestic currency less valuable and reduces its power of exchange against foreign currencies and can thus buy a smaller amount of foreign currency (Isard, 1995). This consequently reduces its real value. Devaluation has both negative and positive economic implications (Edwards, 1989). According to Ghosh, Gulde, and Wolf, (2002), the implications are dependent on the exchange rate regime of the country which can either be: 1. Free floating exchange rate where the market forces of demand and supply of currency completely determine its exchange rate. 2. Managed floating exchange rates where the market forces of supply and demand determine the value of currency but there exist some market intervention by the government as part of demand management. 3. Semi-fixed exchange rate where a fluctuation band within which currency can move is set by the government. 4. Fully fixed exchange rate in which a specific exchange rate is set with no room for fluctuation. Britain’s exchange rate regime

Britain adopts the floating exchange rate. This floating exchange rate is among the monetary policy pivotal feature which helps in implementing measures on inflation and consumer prices in Britain (Gwartney, 2009). Valuation of the Sterling Pound is controlled by the market while the government takes control of economic policies. The central bank has a legal right of using appropriate monetary policies to ensure the inflation rate is not affected by Sterling pound’s exchange rate (Aldcroft, & Catterall, 2001). The sterling pound enjoys triple A rating. Triple A rating is the highest rating given by various bond agencies such as Fitch Rating, Standard and poor rating among other concerning bonds. A currency triple A rating indicates shows the credit worthiness of the respective government. Britain losing its triple A rating would weaken the sterling pound further (Gregory, 2012). This paper tends to look at the effects of pound devaluation on the Shell Company in Britain and other companies in UK. Shell Company is among the most valuable and largest multinational companies in the word with its head-quarter based in UK. The company is highly involved in integrated business such as production, refining, trading, power generation, distribution and marketing. Devaluation will increase imports price and lowers the price of exports. This will lead to a decline in demand of imports and an increase in demand for exports. This is because devaluation of the local currency is equivalent to an appreciation in the foreign currency, thus makes the local products cheaper in the foreign market thus they tend to demand more imports from the local companies (Gregory, 2012). On the other hand, imports from such countries become more expensive and less is demanded by the local consumers thus, centeris peribus, local consumption goes down (Dominguez, 1972). High prices on imports results to further rise in inflation; it causes significant problems with employment and growth such as distortion of prices and interest rates, re-distribution of income and wealth, changes the input price and destabilize trade (Goldberg, &, Knetter, 1997). Effects of sterling’s pound devaluation on business

Sterling Pound devaluation affects relative cost of the products and profitability of the companies in Britain and competitors in international market thus affecting investment decision for local and foreign companies (Scotiabank, 2013). The relative cost of labor is lowered immediately after devaluation for the Shell Company to increase the output and profit, since wages and salaries may not be adjustable downwards companies would have to find other alternatives of lowering labor cost other than adjusting the wages. In long run devaluation might raise the cost of capital which would...
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