Devaluation May Provide A Country With Devaluation

1151 WordsFeb 29, 20165 Pages
By looking at the conclusions that are drawn from the analysis of two different case studies, it can be claimed that devaluation might succeed in achieving its main goals (increasing exports, boosting the domestic economy and correct trade imbalances). Nevertheless, the negative consequences that result from it (such as inflation, increasing unemployment, expensive imports) seem to overweight the benefits that devaluation could provide a country with. This thesis will be discussed in the essay firstly by giving a brief definition of devaluation, by addressing its characteristics and causes, and by speculating on why devaluation might work theoretically. Then, it will use the two case studies of a developed (China) and a developing (Bangladesh) countries to support the argument that, overall, devaluation appears to be an unsuccessful economic strategy. First, devaluation is commonly defined as a monetary policy tool that can be used by countries having a fixed exchange rate and it consists of weakening artificially the domestic currency in relation to the foreign ones (Begg et al. 2003). It is usually adopted by states that are facing trade deficits (when imports exceed exports), and its major aim is ‘to raise the prices of foreign goods relative to home goods, in order to create excess demand for domestic production’ (Krugman and Taylor 1976, 1). Several can be the causes for a fall in a country’s export demand (such as high inflation, changes in the foreign exchange
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