Merits of Devaluation of The Currency. Mechanism of correcting Assignment

Merits of Devaluation of The Currency. Mechanism of correcting deficits - Assignment Example UK suffered a huge current account deficit in 2008, as high as 3% of its GDP. Later the deficit was corrected with proper implication of currency devaluation (Pettinger 2009). 2. Mechanism of sustainable investment. Devaluation requires a higher amount of domestic currency for any foreign transaction. This makes it difficult for existing investors of country to switch or transfer their investment from the country that has devalued its currency. Because switching investment to foreign country may worth considerably lesser as compared to the current worth of investment. This will make the existing investors less likely to switch their investment. Hence devaluation ensures sustenance of existing investment in the country. 3. Mechanism of economic growth As mentioned earlier, devaluation of country’s currency results in the soaring of exports and aggregate demand of country’s goods and services. This is likely to result in economic growth of the country at higher rates. 4. Increase in flow of capital A devaluing country facilitates foreign investors in terms of its now relative cheap labor and a country that will stimulate demand, due to its strong export potential, due to devaluation. Hence devaluation provides motivation of higher profitability o the foreign investors and this is likely to result in the increase of capital flow in the devaluing country. China has long been having a devalued currency. China has become home to many manufacturing firms due its export facilitations and inexpensive production. It is mainly due to Chinese devalue exchange rate (News n economics 2010) Demerits of Devaluation of Currency 1. Increase in... It is evident from the study that devaluation is largely believed to correct the trade deficit and balance of payment deficit. Decrease in exchange rate of a country’s currency will render its products and services relatively cheaper for foreign buyers. This is likely to increase demand for country’s goods in foreign market and hence its exports will increase. Moreover devaluation will make foreign goods relatively dearer for domestic buyers and their demand is likely to decrease. This will reduce the imports in that country. Increased exports and reduced imports are likely to correct the trade deficit. This will also improve the current account deficit in Balance of payment accounts and will consequently correct the balance of payment deficit of the devaluing country. UK suffered a huge current account deficit in 2008, as high as 3% of its GDP. Later the deficit was corrected with proper implication of currency devaluation. Devaluation of currency renders imports deare r to the buyers of devaluing country. Since a country cannot produce everything, imports cannot be avoided. However if a country is supposed to import raw material for production of its certain goods it will make the cost of production higher. As a result those goods may not compete efficiently in foreign market as well as their domestic demand will decrease. Devaluation increases country’s exports. This means that it affects badly on the exports of other countries by making its goods cheaper in foreign market.

Develop a Summary on the State of the US Economy Essay

Develop a Summary on the State of the US Economy - Essay Example Additionally, access of low-interest loans and other credits has been easy. This is a chance to property owners to refinances their mortgages. Car sales have also increased significantly due to sufficient liquidity; consumers can take advantage of cheap financial incentives and price discounts by to buy vehicles. However, car manufacturers do not make profit due to the inexistence of price power. The strength of the United States economy is also increasing due to development of GDP brought by defense spending. According to Kubarych, (2002), defense spending especially on military hardware is contributing close to half of the U.S. GDP. The rate of unemployment is still high despite the decrease in the number of job layoffs. Statistics shows that unemployment rate of in the U.S. currently stands at 6% with no hopes of falling. A study by Kubarych, (2002) explains that unemployment rate is likely to increase even further in the future. In addition, most businesses and industries in the U.S. are still making losses despite the economic recovery. Finally, borrowers especially those going for less credit are under tight restriction from lending institutions. The development of the United States economy is likely to slow down in the next 12 months due to factors such as harsh weather conditions, reduction of spending on both the U.S. and countries Europe. Compared to recovery of previous U.S. economy, the recovery of the current economy is slower. However, increase in government spending will likely to foster the U.S. economic growth. A change of fiscal policy is needed to increase economic recovery of the United States. Application of expansionary fiscal policy will improve economic recovery. The fact is that expansionary fiscal policy will lead to increase in aggregate demand. The government does this by increasing spending and reducing taxes. The result is that consumer spending will rise significantly due to availability of extra disposable income (Boyes &