You are on page 1of 25

3/1/2010 Instructor: Ms.

Dalrymple Writing Seminar (Eng 122-D) Class: G1

Topic: Impacts of the true value of a country’s currency (devaluation and revaluation) have its economy.
Research Question: What effects does the value of a currency (when it changes) have on an economy?

By: Vernella Bedminister

Abstract
The major aim of this essay is to inform the audience of the impacts that currency devaluation and revaluation have on an economy. Most importantly to reveal the effects the value of a country’s currency have on its economy. In addition, this essay contains five chapters which all contribute in presenting a great deal of information and knowledge about what currency is, the determinacy of a currency value and the differentiation of strong and weak currency. Also, the impacts that on an economy as a result of currency devaluation and revaluation.

2

Also. Dalrymple for giving guidance and directions in the commencement and completion of the essay. patience.Acknowlegement The student wishes to thank all of her family and friends for encouraging and persuading her in the accomplishment of this essay especially her best friend. Not forgetting. the student is grateful to the people who devoted their time to assist her. she wishes to express much gratitude to Almighty God the Father for providing her with the knowledge. In addition. her teachers Mr. wisdom and understanding of the accomplishment of this essay. 3 . strength. Sanford and Mrs.

Table of Contents pages Abstract 1 Acknowledgement 2 Introduction 4 Chapter 1: Strong currency 6 Chapter 2: Weak currency 9 Chapter 3: Determinant of currency value 12 Chapter 4: Impacts on an economy as a result of currency 4 .

devaluation. 5 . 14 Chapter 5: Impacts on an economy as a result of currency revaluation. 16 Conclusion 18 Bibliography 19 Introduction Every country around the world has a currency which it can consider its own. no one country’s currency has the same value. Many of us think of the word “money” when we hear the term “currency” but they are not the same. Money is defined as any generally accepted medium of change. that is anything that will be widely accepted in society in exchange for goods and services.

Euros. so each currency has a value relative to another. Pesos and US dollars. These changes are made by the country’s government or monetary authority. or coins and banknotes of a particular currency make up the physical aspects of a nation’s money supply. the changes in the Each currency has its own differences which 6 . makes it unique. or if the changes in the exchange rate under a fixed exchange rate regime are small (within the boundaries allowed by the government). In economics. the terms currency devaluation and currency revaluation refer to large changes in the value of a country’s currency relative to other currencies under a fixed exchange rate regime. In addition.On the other hand. Currency comes in many shapes and sizes for example EC dollars. It can be traded for other currencies on the foreign exchange market. If a country has a floating exchange rate regime. some currency may be strong – selling at high prices and worth more than others which are weak. due to the fact that a currency’s value changes when it reflects global supply and demand at any time. currency refers to the type of money that a country uses.

which is a combination of an officially fixed rate and frequent small adjustments that in theory work against a build-up of speculation about a revaluation or devaluation or fixed exchange-rate system. usually expressed as the value of the one in terms of the other. An exchange rate is the amount of one currency that a person or institution defines as equivalent to another when either buying or selling it at any particular moment or the rate at which one currency can be exchanged for another. It can also be said that a currency is a country's unit of exchange issued by their government or central bank whose value is the basis for trade. In simple terms. A country can determine its exchange rates in a floating exchange rate system. a country’s currency may have an impact on an economy because when the currency 7 . where the currency finds its own level in the market. where the value of the currency is set by the government and/or the central bank. In addition. crawling or flexible peg system. an exchange rate is what one currency is worth in terms of another.exchange rate induced by market fluctuations are referred to as currency depreciation and appreciation.

$100 usually will buy more staple goods (food.either devaluates or revaluates. transport. In addition. Chapter One It is important to know the strength of our currency because it gives us an idea of our nation’s purchasing power. For example. A strong currency can also be called a hard currency. it may affect the interest rate. indicating that you would have had a greater purchasing power in the 1950s. level of inflation. you would have been able to buy a greater number of items than you would today. where living costs can be expected to be higher or if you had taken one dollar to a store in the 1950s. A nation’s purchasing power is the number of goods/services that can be purchased with a unit of currency. the strength of a currency may either be strong or weak. clothing) in a developing economy than it will in the capital city of an advanced economy. and in economics. it refers to a globally traded currency that can serve 8 . and economic growth of a country.

a business owner in Antigua who wants to import water to run his business and has only Martinique and Dominica from which to import the water. Also. Due to the fact that the Euro is 62 percent more 9 . it may also put the country at disadvantage. and long-term stable or upward-trending valuation against other currencies on a trade-weighted basis. wouldn’t they? However. In addition. consistent monetary and fiscal policies. Take for example. low inflation. backing by reserves of precious metals. having a strong currency does not always put the country at an advantage to other countries. With a strong currency.as a reliable and stable store of value. institutions and consumers will be able to buy foreign products and services at a low price and because of the low prices inflation may keep low. it will be easy for investors to purchase foreign bonds and stocks at lower prices. institutions and consumers will benefit when they travel to foreign countries since the goods and services in the foreign country would be much cheaper than the goods and services in their own country. Factors contributing to a currency's hard status can include political stability. Most people and countries would prefer a strong currency.

it may be more difficult foreign investors to provide capital to the country with the strong currency in time of heavy borrowing .than the EC dollar.These disadvantages may devaluate the 10 . From the example given above. since the firms must compete with lower-priced foreign goods and services. it can be said that the economy of both countries would be affected due to the value of their currency. it is a disadvantage for the French innkeeper because the business owner in Antigua will import the water from Dominica to avoid the expense of the exchange. However. it can be said that the Euro has a stronger value meaning that it has more purchasing power against the weak EC dollar. Also. The purchasing power of the EC dollar to the Euro will decline since the EC dollar weakens against the Euro. Tourists from the foreign countries may find it too expensive to visit the country and therefore decide to go elsewhere. it is plain to see that firms with a strong currency may find it difficult to compete with foreign countries due to the fact that the foreign countries want to buy goods and services at low prices. Therefore. In addition. the prices of their goods and services must be lowered or else they may not bought.

Chapter Two A weak currency may also be called a soft currency. Weak currency countries have frequent currency 11 .country’s currency or eventually bring down the GNP of the country if they continually happens. and it is a currency said to be a less desirable form of payment than other currencies.

The Portuguese Escudo. for example.S. governments from these developing countries will set unrealistically high exchange rates. Dollar. may be a weaker currency than the U. Foreign exchange dealers generally do not make markets in weak currencies. but its relative weakness may not be significant enough to discourage exporters from accepting it as payment.devaluations against currencies deficits. of major trading partners. Acceptability of one currency versus another is dependent. and other countries do not want to hold these currencies due to political or economic uncertainty within the country with the soft currency. except for currency speculation. A dealer who expects a weak currency to decline in value may sell that currency short. making a profit from the difference in exchange rates. Currencies from most developing countries are considered to be soft currencies. on local market conditions. of course. The values of soft currencies fluctuate often. currencies generally trade at a discount in relation to currencies of economically developed countries. Often. pegging their currency to a 12 . These balance of payment or political instability.

With a weak currency. Institutions and consumers may also find it difficult to travel abroad because of the cost of travelling and the high price of goods and services in the foreign countries. if a citizen from America decides to take a vacation. this may contribute to an even higher cost of living due to the fact the prices on foreign products and services are high. It is logical that cheaper goods and services would be brought over the expensive ones therefore the weak currency would be at an 13 .S. weak currencies also have their benefits. which country would that person visit and why? The citizen from American would visit a foreign country with a weaker currency than his country because it would be cheaper for him.currency such as the U. Soft currency indicates a type of currency whose value may depreciate rapidly or that is difficult to convert into other currencies. dollar. Although most people believe that it is more beneficial to have a strong currency. institutions and consumers face higher prices on foreign products and services therefore placing a strain on the currency and even increase the inflation rate. For example. In addition.

making it more expensive for them to buy stocks and bonds of the country. In addition.advantage. increasing the money supply of the country. it can be said that firms will find it easier to sell their goods and services in the foreign markets due to the fact that consumers chase cheaper goods and services. From the example given above. 14 . and as a result. the firms may find it more competitive to keep the prices low since they are the ones with the low prices and the countries with stronger currency prices are always high. The capital market of the country would become more attractive to the foreign investors therefore. Foreign tourists would visit the country since they are able to afford. standing a better chance against the stronger currency.

governments. The 15 . and investors. The factors that follow may have a positive or negative effect on the demand for a particular currency. The demand and supply of a currency is really what determines a country's currency value. if the demand is low. the value of the country’s currency may remain the same or decrease. If a particular country's currency is in high demand by purchasers such as travelers. However.Chapter Three Having knowledge about the determinacy of a currency is very important because the determinacy of a currency is what that may increase or decrease the currency. this will increase the value of the country's currency.

degree of consumer spending. Any time you have more than normal of anything. Government Growth. If a country prints an excessive amount of currency. Prices of Foreign Goods. crude oil. Interest Rates. High unemployment. this can decrease the demand for that country's currency. Political Conditions of a Country. Tax Cuts for the Consumer. this results in a decrease in its value. War and Terrorists Attacks. decrease consumer spending. here we are talking about the degree of unemployment. this can decrease its currency value. This is true whether you are talking about currency or commodities such as iron ore. more then what it normally would. If a country's economy is not doing well. 16 . President's Popularity.thirteen main factors that may determine a country’s currency are: The printing of a currency. A small amount of currency in circulation can result in the value of the currency increasing. Housing Market and Positive or Negative Perception. silver and platinum. National Debt of a Country. Specifically. Current State of the Economy. A large amount of currency in circulation can lower the value of a currency. and extent of business expansion that is taking place in a country. gold. How Secretive is a Country. coal.

means a poor economy and a decrease in currency value. energy consumption. These also can determine the demand for a currency. and ultimately currency value. and therefore determine its value.with a decrease in business expansion. How a potential buyer of a currency looks at a particular country using these parameters. and local economies. And here. 17 . employment growth. There are other factors such as manufacturing growth. and even the weather and its effect on the agricultural industry. perception means everything. The factors listed here determine the perception that a potential buyer of currency may have. will determine the demand on the currency. the factors presented here are determinants of the degree of demand on a currency. To conclude. degree of entrepreneurship in a country.

consequently. Significant problems that currency devaluation may cause are increasing the price of imports and stimulating greater demand for domestic products. For example. as the capital 18 . Inflation is a rise in the general level of prices of goods and services in an economy over a period of time. When the price level rises. selling stock and buying gold. inflation is also erosion in the purchasing power of money – a loss of real value in the internal medium of exchange and unit of account in the economy. or may lead to reductions in investment of productive capital and increase savings in nonproducing assets. This can reduce overall economic productivity rates. devaluation can aggravate inflation. Inflation decreases the real value of money and other monetary items over time. uncertainty about future inflation may discourage investment and saving.Chapter Four Devaluation is viewed as a sign of weakness. each unit of currency buys fewer goods and services. and the creditworthiness of a country may be jeopardized.

money becomes more expense. High inflation may lead to shortages of goods if consumers begin hoarding out of concern that prices will increase in the future. Interest rates are normally expressed as a percentage rate over the period of one year. An interest rate is the price a borrower pays for the use of money they borrow from a lender. lenders are more prepared to offer loans while borrowers are more reluctant to take them. but at the cost of slower economic growth. by lending it to the borrower. At higher interest rates. That. for instance a small company might borrow capital from a bank to buy new assets for their business. and the return a lender receives for deferring the use of funds. The government may have to raise interest rates to control that inflation. This is why the cost of the quality of goods and services produced which is economic growth will slow down. When interest rates rise. constricts demand for loans and increases the supply of money for loans.required to retool companies becomes more elusive or expensive. in turn. 19 .

One reason for this is that it is difficult to renegotiate some prices. Many prices are "sticky downward" and 20 . Changes in inflation are sometimes attributed to changes in real demand for goods and services or fluctuation in available supplies (that is changes in search) and sometimes of value of currency. to lower inflation or to please investors and trading partners. A small amount of inflation is generally viewed as having a positive effect on the economy.Chapter Five In some cases a country may revalue its currency in response to a positive economic condition. and particularly wages. so that with generally increasing prices it is easier for relative prices to adjust. downwards. this affects the business’ performance. High rates of inflation are caused by growth of the rate of money supply. As a result. This would imply that existing currency increased in value as opposed to the case where a country issues a new currency to replace an old currency that had declined excessively in value.

There would be rapid economic growth and the creditworthiness of the nation wouldn’t be jeopardized because revaluation is viewed as a sign of economic strength. 21 .tend to creep upward. if the inflation rate is low. and to effectively reduce long-term spending by making products of the business firm less affordable. which is generally viewed as a negative by Keynesians because of the downward adjustments in wages and output that are associated with it. because modest inflation means that the price of any given good is likely to increase over time there is an inherent advantage to making purchases sooner than later. Efforts to attain complete price stability can also lead to deflation. High inflation. This effect tends to keep an economy active in the short term by encouraging spending and borrowing. More generally. the government would not have to increase interest rates to control inflation. However. so that efforts to attain a zero inflation rate (a constant price level) punish other sectors with falling prices. and employment. and in the long term by encouraging firms to invest. though. profits. tends to reduce long-term capital formation of the business firm by hurting the incentive to save.

Also. revaluation encourages investor’s confidence in the country’s economy and the country’s ability to secure foreign investments. 22 .

there are other specific factors that are just as important and this factors need to be take in consideration if an individual wants to know the value of a currency with respect to other monetary units. Revaluation of a currency may be seen as a way to 23 . which means while the value of currency value is high (during revaluation) and while currency' value is low (during devaluation).Conclusion It is now well known that fluctuation of the power of currency ( value of currency) has both negative and positive effects. Devaluation and revaluation of a currency may have many impacts on an economy however only a few impacts were mention. Although the demand and supply of a currency is really what determines a country’s value. A strong currency and weak currency both have their advantages and disadvantages therefore a country needs to take advantage of the strengths of their currency in order to increase its economic growth. This has been shown based on every possible economic status of a country.

yahoo. An introduction to Modern Economics. United States: Oxford University Press.com/question/index? qid=20080423070056AAVG5Jx 24 . and Chrystal A.mozilla:en-US:official&client=firefox-a http://www.com http://www.New Jersey: Prentice Hall. not just because the devaluation of currency may be as a sign of economic weakness doesn’t mean that the economy is worthless. However. Bibliography Hardwick Philip.1999. the economy cab be stimulated by increased foreign demand.dm/search?q=currency+devaluation&ie=utf8&oe=utf-8&aq=t&rls=org. Economics. 5th edition. and Khan Bahadur. www. and Griffen W. Business Essentials.mozilla:en-US:official&client=firefox-a http://answers.10th edition.mozilla:en-US:official&client=firefox-a http://www. Langmead John.google. 2004. United kingdom: Preston Hall.com Lipsey G.dm/search?q=currency+revaluation&ie=utf8&oe=utf-8&aq=t&rls=org. 2007.pearsoneduc.strengthen an economy. http://www.google.google.dm/search? q=determinants+of+currency+value&ie=utf-8&oe=utf8&aq=t&rls=org. Ebert J. 6th edition.thecurrencyhouse.

org/glossary/exchrate.ehow.htm 25 .http://www.economicswebinstitute.html http://www.com/about_5457141_affects-currency-rates.