Th4.1: Competitive Devaluation/Depreciation

Question 1

What is competitive devaluation/depreciation?

Answer 1

where a country deliberately intervenes in foreign exchange markets to drive down the value of their currency to provide a competitive boost to their exporting industries

Question 2

What will a weaker currency encourage and discourage?

Answer 2

encourage exports and discourage imports and therefore the balance of payments should improve assuming the Marshall-Lerner condition

Question 3

What is the problem with a weaker currency?

Answer 3

that this can cause inflation and this may reduce competitiveness, leading to a fall in the balance of payments

Question 4

What is one problem involving other countries?

Answer 4

other countries may follow and reduce their currency as well - unlikely if there is a current account deficit but if the country who devalues has a surplus, other countries are likely to retaliate