What does it mean devaluation?

What does it mean devaluation?

August 2, 2016


 
Devaluation is to reduce the official exchange rate for the currency rate against an international reference currency (US dollar or the euro , for example), so at least the number of units of foreign currency that can be obtained in exchange for one unit of the national currency.

The right to talk about devaluation (Devaluation) when the exchange rate under the direct management of the state, which sets this price through a government decision.

But when the exchange rate is subject to the forces of supply and demand (to float the currency) and gets a decline in the value of the currency, the former is to talk about currency depreciation (Depreciation).

In the sense that the reduction is a voluntary act of the state, while the decline is the result of an automatic free interaction between supply and demand in the foreign exchange market without direct intervention from the state.

According to the same logic, we can talk about a currency revaluation (Revaluation) in exchange for reduced, and the high value of the currency (Appreciation) in return for fall.

Motives and goals

Resorting States to the decision to reduce the value of their national currencies mainly in order to restore balance to their trade balances that defines an important structural deficit, or at least to reduce the size of the deficit.

Reducing the value of the national currency leads to make the prices of imported goods more expensive for residents, which presumably would limit the purchase of goods coming from abroad and encourages demand for national products.

If that happens, the natural Ventajtah are declining volume of imports and the lack of foreign currency invoice (and not necessarily a shortage of the bill of imports denominated in the national currency, because the impact of the depreciation of the currency can be greater than the impact of the decline in the volume of imports).

In contrast, prices of manufactured goods locally become cheaper for foreigners, which supposedly will enhance the competitiveness of domestic products and thus raise the volume of exports to the outside.

If imports fell and exports have multiplied enough, it restores the balance of trade equilibrium.

Some countries have resorted to the decision to reduce the value of its currency in order to stimulate national production in order to increase the growth rate

Economic and reduction of unemployment through employment and the provision of new job positions escort to increase production.


Conditional relationship

Proven human experience (in developing countries, specifically) and economic theory alike, that the relationship between devaluation and the reduction of the deficit of the trade balance and stimulate the national economy is not a mechanism of relationship, but conditional on many factors and determinants of relationship.

There are two factors are among the most important factors that determine the effectiveness of any policy based on the exchange rate devaluation, namely:

- The ability of national productivity machine, weaving local entrepreneurial (IT and financial and human) to manufacture goods imported from abroad similar or reasonable quality and a competitive price, and the establishment of national products place.

And respect, especially in goods processing command (machines, for example) complex consumer goods (some electronic devices smart such as telephones, for example), which is hard produced a lot of countries because of the lack of the necessary technology or sources of the massive funding required for the completion of such projects due to the density of capitalism.

- The extent of the price elasticity of exports and imports, meaning the response of demand for exports and imports with the price change resulting from the devaluation.

When is the price elasticity of some imported consumer goods on a large scale is weak, because they do not manufacture locally or because the demand for them as a result of considerations is sensitive to price (quality, innovation and content technology), the high prices of these goods does not have much effect on the volume of consumption locally and therefore do not lead to a significant decrease in imports.

In contrast, when the price elasticity of some of the most important goods exported to be weak due to a lack of competitive elements of past price or the intensification of international competition on them, the lower the prices of these commodities does not have much effect on the volume of consumption abroad and therefore do not lead to a significant rise in exports.

double-edged sword

Rather than lead Devaluation stimulate domestic production and growth of the national economy, can such a measure would be counterproductive and negative effects of plunging the economy into recession because of hyperinflation, which may result in higher prices of raw materials (eg energy such as oil and gas resources) and imported equipment.

The reason for this is that the high prices of inputs in the production process automatically reflected in the final product , which in turn increases prices, which reflected negatively on demand through contraction. This leads to a decline in sales, then the production, Vtqla contracting for investment and the economy enters a contraction cycle.

Experiencing some developing countries experience such as Mexico and Argentina, it has been the devaluation accompanied with these two countries often escalating inflation and declining production.

But the effects of the devaluation remain practically on the whole economy hostage to the nature of each separately, and specialties productivity, and the level of openness and integration into the international trade, and the composition of its foreign trade



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