Devaluation occurs when the exchange rates fall so that the value of the currency becomes less compared to other nations. Exports prices drop drastically and a prolonged inflation is realized. On the other hand, the imports will become more expensive. When the value of the currency of a country drops, it makes the exports more competitive. This competitiveness is achieved without any effort. However, this can be consequential when it happens for a long time, as it may decrease incentives for firms to reduce costs. It could also cause firms not to increase their productivity, which in turn heightens the prices. The costs of importing products into that country will be raised.
A normal economy will be attained when more products are exported to other countries. A depreciation will increase the cost of imports so that not many countries will be willing to sell their products. However, the domestic demand will increase resulting in a demand-pull inflation. Domestic companies will be advantaged, as they will realize increased sales. Consequently, more job avenues will be created so that unemployment rates are reduced, particularly in export firms. The government can utilize expansionary policy as a monetary policy to boost the money supply and lower interest rates. Reduced interest rates will motivate borrowing and banks will be more willing to lend money to companies. Attractive interest rates motivate businesses to borrow finances so that they enlarge production and inspire customers to acquire more goods and services.
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In the short-term, demand for exports may be rigid which implies that the current account remains constant. Nonetheless, after an extended time, there will be more demand for exports, as it will become more elastic. This will improve the current account of that country so that things attain their normalcy. The country should intensify domestic tourist industry since it will be more costly to travel abroad but the tourists from other countries will find it more attractive to visit. The government can promote fiscal policy that increases spend and reduces taxes. This move will make more businesses and consumers have money causing them to expand and acquisition of more goods and services.
Russia is such a country that experienced a financial crisis ending up accumulating many debts. The government decided to focus on the consumers as the major growth driver of the economy to counter the situation. Russia utilized its oil wealth to channel around $60 billion to financial institutions and stock market. This move created more jobs for the citizens who received higher wages, and reduced cases of unemployment. More money in the bank invited more investors to borrow and to meet up the demand for oil products, which increased both locally, and among other foreign countries. This made Russia achieve a normal growth rate of about 3 percent in 2016.
In addition, the economy of China had been dwindling at some point over the past years. China spotted its labor force to support investments, and began encouraging foreign direct investment into the country. Most foreign investors preferred to come to China where they could find cheap labor and expand their operations. The labor force in other developed nations cannot be afforded at the expense of investors making profits. Thus, through many investments more employment opportunities have been created in China, which has ultimately boosted the economy of the nation. In fact, the nation is almost being crowned a superpower.
In conclusion, the country can benefit if its export prices drop drastically, and with a prolonged inflation. A normalcy will be achieved through increased exports that boost the rate of economic growth and reduce unemployment. In the end, the current account deficit of the country is improved considerably.
