Question

reflect on if you believe currency depreciation solves the economic problems of a country.

Answer 1

The currency depreciation will not the economic problems of a country. Depreciation of a Currency is the fall in the value of one currency relative to another. Solving of economic problem depends on the state of the business cycle. When it is recession devaluation can help enhance growth without causing inflation. In a boom, devaluation is more likely to result to inflation. Also it may take a while to boost the current account because in the short term demand is inelastic. But when demand is price elastic, then it will result to a relatively bigger increase in demand for exports. Furthermore, when the nation has lost competitiveness in a fixed exchange rate, a depreciation of currency could be beneficial in solving that fall in competitiveness. A developing economy which relies on import of raw materials may face more expenditure from a devaluation which makes basic goods and food more expensive. Thus the impact of devaluation depends on many factors which has been discussed above. Currencies are undervalued often deliberately by the governments; for instance, by setting artificially low exchange rates or manipulating the money supply. They do this because they know that it will likely to save money, thus is considered as a kind of cheating. Thus I believe it is not a correct approach to solves the economic problems of a country. Moreover it reduces the real wages, purchasing power of citizens abroad, and scare off international investors.