...Assignment Currency Devaluation Introduction Devaluation refers to a decrease in a currency's value. A currency devalues when its value declines in relation to one or more other currencies. It affects the demand for exports and imports. Currency devaluation is evaluated in terms of the foreign exchange rate. Exchange rate is the value between two currencies shows how much one currency is worth in terms of other currency. The depth and intensity of exchange rate volatility and its impact on the volume of international trade was recognized during 1970s when the world economy shifted from fixed exchange rate to free floating exchange rate. If the exchange rate volatility is higher, then it will generate uncertainty of the future profit from export trade. In this assignment we will discuss on such issues like exchange rate volatility I addition to currency devaluation and its impact on the volume of international trade of developing country focusing Bangladesh. This assignment is based on the exchange rate and its volatility in addition to devaluation that affect on the on international trade of Bangladesh. The concept of the study is taken from the academic activity of ECN-201 course instructed by Mrs. Nahid ferdousi, lecturer of Department of Business Administration of University of Asia Pacific. This paper consists of three parts. In first part we will give a short description of currency valuation and factors that affects the currency valuation, and then we animated...
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...Currency devaluation is good for a country In the recent year, the global financial crisis is more increasingly serious and many countries have become a victim. Consequently, currency devaluation is a considerable option to improve the status quo. Devaluation is viewed as a method of improving a country's "competitiveness", or in other words rendering domestically produces goods more attractive abroad while making foreign produced goods less attractive at home (Miles 1978, introduction 2). Supply-and-demand forces determine the exchange value of a currency in exchange markets which are fundamentally the result of the debit and credit items in the balance of payments (Gilbert 1979, 112). Historically, an issuing authority who certified the weight and purity of the precious metal published the early currencies--coins. A government in need of short on precious metal might abruptly lower the weight and purity of coins to devaluate the currency (from Wikipedia). After the Second World War, currency devaluation is a means as a counter-economic crisis and stimulates the development of economic in many countries. When a country face the balance of payments deficit, the strategy of local currency devaluation can be changed previous condition through the decrease of the currency exchange rate, which seems an advisable way to reduce the deviation of prices and to resume the contribution margin ration of exports commodities. Earlier devaluations are characterized by weak fundamentals,...
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...Financial Markets & Institutions Group Assignment Yuan Devaluation Group 2 Group Members Kouadio Dieudonne XPGDM-18 Rohit Khandelwal XPGDM-28 Shruti Tibrewal XPGDM-32 COUNTRY AT A GLANCE Population | 1.364 billion | 2014 | GDP | $10.35 trillion | 2014 | GDP growth | 7.3% | 2014 | Inflation | 2.0% | 2014 | CHINA Economic Overview The Chinese economy experienced astonishing growth in the last few decades that catapulted the country to become the world's second largest economy. In 1978—when China started the program of economic reforms—the country ranked ninth in nominal gross domestic product (GDP) with USD 214 billion; 35 years later it jumped up to second place with a nominal GDP of USD 9.2 trillion. Since the introduction of the economic reforms in 1978, China has become the world’s manufacturing hub, where the secondary sector (comprising industry and construction) represented the largest share of GDP. However, in recent years, China’s modernization propelled the tertiary sector and, in 2013, it became the largest category of GDP with a share of 46.1%, while the secondary sector still accounted for a sizeable 45.0% of the country’s total output. Meanwhile, the primary sector’s weight in GDP has shrunk dramatically since the country opened to the world. China weathered the global economic crisis better than most other countries. In November 2008, the State Council unveiled a CNY 4.0 trillion (USD 585 billion) stimulus package in an...
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...After reading this week’s material, it became a little easier to understand several impacts of currency devaluation and revaluation on international trade. Before I begin to provide the impacts I will first define devaluation and revaluation. Zaiby (2008) says that devaluation occurs when a nation decreases the value of their currency to match the value of gold or other countries; it can be seen as a means to correcting a deficit that is interchangeably with depreciation through values of money supply and demand (para. 2). Critics believe that devaluating the value of a dollar might be beneficial to an economy; because a lower dollar value, which in turn enhances manufacturing production, boost employment and improve and sustain economic growth of a nation (McConnell, Brue and Flynn, 2015). On the other hand, other critics view it as a dangerous game to play, which the country will possible lose investors or will never gain another investor (McConnell, Brue and Flynn, 2015). In addition, the country will have financial issues, trade deficits, increased interest rates and may see a recession. This process of devaluation can save an economy to sustain economic growth; therefore, several impacts come to mind relating to devaluation. They include export stimulation on merchandise, discouraging imports on merchandise, illegal leakages on foreign exchange, debt and debt service liability burdens on foreign payments and loans, budget deficits cost-price relationship issues and...
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...A Case Study of a Currency Crisis: The Russian Default of 1998 Abbigail J. Chiodo and Michael T. Owyang currency crisis can be defined as a speculative attack on a country’s currency that can result in a forced devaluation and possible debt default. One example of a currency crisis occurred in Russia in 1998 and led to the devaluation of the ruble and the default on public and private debt.1 Currency crises such as Russia’s are often thought to emerge from a variety of economic conditions, such as large deficits and low foreign reserves. They sometimes appear to be triggered by similar crises nearby, although the spillover from these contagious crises does not infect all neighboring economies—only those vulnerable to a crisis themselves. In this paper, we examine the conditions under which an economy can become vulnerable to a currency crisis. We review three models of currency crises, paying particular attention to the events leading up to a speculative attack, including expectations of possible fiscal and monetary responses to impending crises. Specifically, we discuss the symptoms exhibited by Russia prior to the devaluation of the ruble. In addition, we review the measures that were undertaken to avoid the crisis and explain why those steps may have, in fact, hastened the devaluation. The following section reviews the three generations of currency crisis models and summarizes the conditions under which a country becomes vulnerable to speculative attack. The third section...
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...Definition: Balance of payments (BOP) accounts are an accounting record of all monetary transactions between a country and all other countries of the world. These transactions include payments for the country's exports and imports of goods, services, financial capital, and financial transfers. The BoP accounts summarize international transactions for a specific period, usually a year, and are prepared in a single currency, typically the domestic currency for the country concerned. Sources of funds for a nation, such as exports or the receipts of loans and investments, are recorded as positive or surplus items. Uses of funds, such as for imports or to invest in foreign countries, are recorded as negative or deficit items. Britannica Concise Encyclopedia: Systematic record of all economic transactions during a given period between residents (including the government) of one country and residents (including the governments) of other countries. The transactions are presented in the form of double-entry bookkeeping. Barron's Banking Dictionary: Accounting of a country's economic transactions with foreign countries in a stated period of time, normally one year. The balance of payments for any country is divided into two broad categories: the Current Account representing import and export trade, plus income from tourism, profits earned overseas, and interest payments; and the capital account, representing the sum of bank deposits, investments by private investors, and debt securities...
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... Exchange Rate Exchange rate between two currencies is the rate at which one currency will be exchanged for another. How to calculate exchange rate Each country manages the value of its currency through varying mechanisms. The currency can either be free-floating or fixed. 1. Movable or Adjusted Peg System A system of fixed exchange rates, but with a provision for the revaluation (usually devaluation) of a currency. E.g. Between 1994 and 2005, the Chinese Yuan renminbi (RMB) was pegged to the United States dollar at RMB 8.2768 to $1. 2. Free Floating System In this system the exchange rate is allowed to vary against that of other currencies. It is...
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...1.0 Summary of the article It is not surprise to everyone that China has a major role in the global economy since its economic growth has moves the country into the ranks of middle income countries. Unfortunately, issues that China faced in most recently are whether it can contribute to the vigour of the worldwide economy and manage its internal stability. China's economy is now weakening and its GDP is perhaps below the government target of 7%. Investment sentiment is the weakest indicator, while the production level in China's industries has dropped which left surplus production capacity in the industries. Although China growth is slowing down, the probability that it will collapse suddenly is small. 2.0 Discussion The biggest problem in China is that the massive debt explosion is now threatening its entire economy, leading to a reduction in capital investment. There has been a boom in the Chinese stock market, yet buying share with borrowed money had magnified the fall when companies with huge debt begin to sell their investments to pay debts (Walker, 2015). Shanghai Composite Index decreased about 8.5% in August followed by China economy downturn which perhaps was the biggest decrease since 2007 (McHugh, 2015). Overreaction in Chinese market then affect the world such as Japan's Nikkei index had slipped by 4.6%, while the Eurofirst 300 index has had its worst day since 2009 (Matthews, 2015). However, falling of stock markets in itself will not cumber the global economy...
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...Latvia: Navigating the Strait of Messina | | Introduction This report indicates the history of Latvia country and the transition period of independency and the shifting to market economy. The country growth was very fast until 2008. In December 2008, facing the possibility of financial collapse and a currency crisis, they asked for a rescue and they received a $10.5 billion package funded by the International Monetary Fund (IMF), World Bank, EU, and several countries in the region. After that, it talks about the possibility that could help Latvia to restore a sustainable growth. Which are either Devalue the national currency or maintain the peg and attempt an “internal devaluation”. Executive Summary 1. To study economic adjustment under a fixed exchange rate system 1. Explore the meaning of a "sudden stop" in capital flows and causes of Latvia's economic boom and busts. 2. Assess the tradeoffs involved in internal and external devaluation in the Eurozone. 3. Consider historical, political, economic, and other factors that influenced Latvia's policy decisions and their outcomes. 4. Predict the long-term impact of Latvia's policy decisions during the crisis. Contents Introduction 1 Executive Summary 2 Analysis 4 Analysis 1) Historical, political, economic, and other factors that influenced Latvia's policy decisions and their outcomes (Learning objective# 5) | 2) Problems and the crisis and its causes...
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...which the U.S. parent exports U.S.-manufactured products to Mexico and other countries. When dealing with key customers, the exporters do accept pesos, but exports are regularly billed in USD. As a result, they have receivables in both USD and Mexican pesos, which can be seen as both an opportunity and a threat in relation to the devaluation of the peso. • Farmington de Mexico – This facility is a 100% Mexican-owned subsidiary that focuses on locally manufactured products to domestic companies. Seeing as the company’s market share is substantial, their primary practice is to transfer a large percentage of its profits to the parent’s U.S. bank accounts. Sales transactions are made with Mexican pesos, which are then exchanged for USD, before being transferred to U.S. bank accounts. • Exportaciones (Farmington) S.A. – This facility is located in Veracruz, a port city on Mexico’s east cost, and manufactures products for export to Latin America. Built at the same times as the Farmington de Mexico facility, payables are in USD, and much like the other facility, Exportaciones repays a large percentage of its earnings to U.S. bank accounts. The devaluation of the peso should lead to a positive effect on the company’s...
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...(iv) Your country is in a recession. You feel that a policy of exchange rate depreciation will stimulate aggregate demand and bring the country out of the recession. This essay examines the effectiveness of using exchange rate depreciation to stimulate aggregate demand in order to bring a fictional country, Australand, out of recession. It will explain how a policy of exchange rate depreciation can increase aggregate demand and how this will stimulate economic activity and bring Australand out of recession. The process of depreciating the currency will be explained as well as possible ramifications of this policy. Alternative options to increase aggregate demand will also be explored. A recession is technically when an economy has experienced two successive quarters of negative gross domestic product (GDP) growth. For this to happen the total amount of goods and services produced by a country must contract on a quarter by quarter basis for six months or more. (http://news.bbc.co.uk/2/hi/business/7495340.stm) It therefore stands to reason that by increasing the total amount of goods and services Australand produces, known as aggregate output, will bring Australand out of recession. Blanchard and Sheen (2009 p39) state that in the short run the main determinent of aggregate output is demand and that changes in demand can lead to an increase in output. Aggregate demand is the total quantity demanded for output at a given price level and it is therefore necessary to...
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...reduction in public expenditure, etc. Deflation would make our items cheaper in foreign market resulting a rise in our exports. At the same time the demands for imports fall due to higher taxation and reduced income. This would built a favourable atmosphere in the balance of payment position. However Deflation can be successful when the exchange rate remains fixed. 2. Exchange Depreciation Exchange depreciation means decline in the rate of exchange of domestic currency in terms of foreign currency. This device implies that a country has adopted a flexible exchange rate policy. Suppose the rate of exchange between Indian rupee and US dollar is $1 = Rs. 40. If India experiences an adverse balance of payments with regard to U.S.A, the Indian demand for US dollar will rise. The price of dollar in terms of rupee will rise. Hence, dollar will appreciate in external value and rupee will depreciate in external value. The new rate of exchange may be say $1 = Rs. 50. This means 25% exchange depreciation of the Indian currency. Exchange depreciation will stimulate exports and...
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...in liability * Trade balance 3. Almost always referring to merchandise, “tangible goods trade * Types of capital 4. Foreign Direct Investment (FDI) (LTC) 5. Portfolio * Stocks * Bonds 6. Other Capital * Bank loans * 3 types of FC Reserves 7. Gold 8. Freely convertible currency * 60% US * 25% euro * 10% Yen 9. SDRS (IMF $) – Paper money * Special drawing rights * Less than 1% in fed reserves * 3 Macro Options (J. F. Kennedy) 10. FX System to adopt 11. Convertibility and currency controls/transactions (US current policy is free/no control) * China restricts amount citizens can invest in foreign investments 12. Trade (protect home market or open export markets) 1/18/13 FX rate change depends on the strength of the currency Dealing with Euro and European debt crisis Diversification of portfolio Some of portfolio in Euro denominated bond. 1/23/13 * Decline of the dollar * Devaluation -> inflation * Expectations of devaluation * Purchasing Power Parity-Long Run * Increase imports price (demand inelastic-not sensitive to price) * Domestic producers increase prices * CPI * Interest rates – short run predictor * Real interest rates * Nominal interest rates with the rate of inflation * Negative real interest...
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...The gold standard is a monetary standard that pegs currencies to gold and guarantees convertibility to gold. It was thought that the gold standard contained an automatic mechanism that contributed to de simultaneous achievement of balance-of- payments equilibrium by all countries. The gold standard broke down during the 1930’s as countries engaged in competitive devaluations. The Bretton Woods system of fixed exchange rates was established in 1944. The U.S. dollar was the central currency of this system; the value of every other currency was pegged to its value. Significant exchange rate devaluations were allowed only with the permission of the IMF. The role of the IMF was to maintain order in the international monetary system to avoid a repetition of the competitive devaluations of the 1930s and to control price inflation by imposing monetary discipline on countries. The fixed exchange rate system collapsed in 1937, primarily due to speculative pressure on the dollar following a rise in U.S inflation and a growing U.S. balance-of-trade deficit. Since 1973 the world has operated with a floating exchange rate regime, and exchange rates have become more volatile and far less predictable. Volatile exchange rate movements have helped reopen the debate over the merits of fixed and floating systems The case for a floating exchange rate regime claims that such a system gives countries autonomy regarding their monetary policy and that floating exchange rates facilitate smooth adjustment...
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...(b) Evaluate the likely result of a change in currency prices on the UK economy Price Level A change in the price of currency will have many impacts upon the economy such as upon Balance of Payments, a change in real GDP, employment and inflation. rGDP AD2 AD1 AS Assuming demand is relatively elastic, an appreciation of the currency results in a lower AD, shown by AD1 decreasing to AD2, as lower export demand and greater spending on imports causing a fall in domestic AD. This reduces economic growth, shown by a decrease of Y1 to Y2. Furthermore we would see lower inflation, shown by P1 decreasing to P2 as import prices are cheaper, as well as lower AD leading to lower demand pull inflation and manufacturers having greater incentives to cut costs to remain competitive. This is assuming demand is relatively elastic - if the demand was more inelastic, the result will be vastly different - there will be less of a decrease in economic growth and inflation. Assuming demand is elastic, an appreciation of the currency price would worsen the current account position. As exports are more expensive and imports are cheaper, we see a decrease and an increase in both respectively. This will cause a bigger deficit on the current account, having negative implications upon the economy such as becoming uncompetitive and leading to a further decrease in export led economic growth. However, the impact on the current account isn't certain - an appreciation will tend to reduce inflation, making...
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