Why devaluation of currency is important?

Question

Concern with international e conomics.

Answer 1

Devaluation of currency is another word for inflation. Usually the former is in international context & the latter in domestic context. The value of currency is based on the health of that country's economy & the confidence or lack of it people have in the currency.

When currency starts to lose its value a little bit, it makes it easier to export goods to other countries, because goods from the export country cost less to by. This is a normal, somewhat cyclic phenomena; as such it is temporary & if the country's economy is fundamentally sound the currency will rebound.

When currency starts to shrink more than a few percent per year (even that can be a warning signal) and the trend continues, problems start to arise. Goods from other countries bacome more expensive. [ If countries each had all the resources they needed within their own borders it would be less of an issue, but this is not so, & international trading is not optional - many goods are no longer produced in some countries like the US.]

Domestic goods also become more expensive. Prices climb as the currency becomes worth less. When prices are rising it makes less sense to save money, because it will be worth less tomorrow than it is today. (a problem with any degree of devaluation/inflation)

Extreme cases are post WW I Germany where people were being paid twice a day because prices would go up between lunchtime & dinner time, so on lunchbreak people could rush uot & buy groceries or whatever. A contemporary example of long term double digit inflation, not quite so very bad but still out of control, is Argentina.

When a country's currency is devalued, everything denominated in that currency becomes devalued, therefor prices must ascend to reflect their actual value. When countries have devaluation problems, they have trouble attracting investment capital. This is very important - investment capital is how new companies start & how sometimes companies already existing get money to expand. Therefore, without investment capital, it's harder to create jobs.

Recap: devaluation of currency makes foreign goods more expensive, domestic goods more expensive, reduces investment capital, hurts job growth & interferes with the establishment of new companies. It also creates a disincentive to save money. (private saving is the foundation of a healthy economy.)

Hope this helps.

;-)