International Finance

Topics: Currency, Venezuela, ISO 4217 Pages: 3 (684 words) Published: October 5, 2014

1) Why must a country’s currency be devalued? What is failing in the economy? Devaluation is the action of a government or central bank authority to drop the spot foreign exchange value of a currency that is pegged to another currency or to gold. Countries occasionally devalue their own currencies as a result of persistent and sizable trade deficits. They intentionally devalue their currencies in an effort to make their exports more price-competitive on world markets Competitive devaluations are often considered self-destructive, however, as they also make imports relatively more expensive. There are many reasons that a country would devalue their currency and many countries have used this method to meet some economic goal. Devaluation could be used to discourage importing from other countries. If the currency is devalued in Venezuela other countries products are more expensive to purchase, so the Venezuelan population will not demand imported items. Another objective of devaluation would be to increase exporting. Devaluation makes the products of the country cheaper and other countries will want more of them. Devaluation could also be used to correct a negative balance of payment. The value and demand for imports needs to be greater than the value and demand of exports. So by devaluing the currency a country can increase demand for their products, producing an in-flow of cash. So the theory behind devaluation would be to make local goods cheaper for exporting and produce and bring money back into the economy, to bring an equilibrium to the market, encourages family members to send money to their home country, and increase investor interest. As Venezuela learned there are negative effects to devaluation such as trade is one sided and locals can’t always make ends meet, devaluation may cause other countries to follow and there is no winner, the country will not be able to meet their foreign debt...
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