3/1/2010 Instructor: Ms.

Dalrymple Writing Seminar (Eng 122-D) Class: G1

Topic: Impacts of the true value of a countrys currency (devaluation and revaluation) have its economy.
Research Question: What effects does the value of a currency (when it changes) have on an economy?

By: Vernella Bedminister

Abstract
The major aim of this essay is to inform the audience of the impacts that currency devaluation and revaluation have on an economy. Most importantly to reveal the effects the value of a countrys currency have on its economy. In addition, this essay contains five chapters which all contribute in presenting a great deal of information and knowledge about what currency is, the determinacy of a currency value and the differentiation of strong and weak currency. Also, the impacts that on an economy as a result of currency devaluation and revaluation.

Acknowlegement
The student wishes to thank all of her family and friends for encouraging and persuading her in the accomplishment of this essay especially her best friend. In addition, the student is grateful to the people who devoted their time to assist her. Not forgetting, her teachers Mr. Sanford and Mrs. Dalrymple for giving guidance and directions in the commencement and completion of the essay. Also, she wishes to express much gratitude to Almighty God the Father for providing her with the knowledge, strength, patience, wisdom and understanding of the accomplishment of this essay.

Table of Contents
pages

Abstract 1 Acknowledgement 2 Introduction 4 Chapter 1: Strong currency 6 Chapter 2: Weak currency 9 Chapter 3: Determinant of currency value 12 Chapter 4: Impacts on an economy as a result of currency

devaluation. 14 Chapter 5: Impacts on an economy as a result of currency revaluation. 16 Conclusion 18 Bibliography 19

Introduction
Every country around the world has a currency which it can consider its own; no one countrys currency has the same value. Many of us think of the word money when we hear the term currency but they are not the same. Money is defined as any generally accepted medium of change; that is anything that will be widely accepted in society in exchange for goods and services.

On the other hand, currency refers to the type of money that a country uses. It can be traded for other currencies on the foreign exchange market, so each currency has a value relative to another. Currency comes in many shapes and sizes for example EC dollars, Euros, Pesos and US dollars, or coins and banknotes of a particular currency make up the physical aspects of a nations money supply. makes it unique. In addition, due to the fact that a currencys value changes when it reflects global supply and demand at any time, some currency may be strong selling at high prices and worth more than others which are weak. In economics, the terms currency devaluation and currency revaluation refer to large changes in the value of a countrys currency relative to other currencies under a fixed exchange rate regime. These changes are made by the countrys government or monetary authority. If a country has a floating exchange rate regime, or if the changes in the exchange rate under a fixed exchange rate regime are small (within the boundaries allowed by the government), the changes in the Each currency has its own differences which

exchange rate induced by market fluctuations are referred to as currency depreciation and appreciation. It can also be said that a currency is a country's unit of exchange issued by their government or central bank whose value is the basis for trade. An exchange rate is the amount of one currency that a person or institution defines as equivalent to another when either buying or selling it at any particular moment or the rate at which one currency can be exchanged for another, usually expressed as the value of the one in terms of the other. In simple terms, an exchange rate is what one currency is worth in terms of another. A country can determine its exchange rates in a floating exchange rate system, where the currency finds its own level in the market, crawling or flexible peg system, which is a combination of an officially fixed rate and frequent small adjustments that in theory work against a build-up of speculation about a revaluation or devaluation or fixed exchange-rate system, where the value of the currency is set by the government and/or the central bank. In addition, a countrys currency may have an impact on an economy because when the currency

either devaluates or revaluates, it may affect the interest rate, level of inflation, and economic growth of a country.

Chapter One
It is important to know the strength of our currency because it gives us an idea of our nations purchasing power. A nations purchasing power is the number of goods/services that can be purchased with a unit of currency. For example, $100 usually will buy more staple goods (food, transport, clothing) in a developing economy than it will in the capital city of an advanced economy, where living costs can be expected to be higher or if you had taken one dollar to a store in the 1950s, you would have been able to buy a greater number of items than you would today, indicating that you would have had a greater purchasing power in the 1950s. In addition, the strength of a currency may either be strong or weak. A strong currency can also be called a hard currency, and in economics, it refers to a globally traded currency that can serve

as a reliable and stable store of value. Factors contributing to a currency's hard status can include political stability, low inflation, consistent monetary and fiscal policies, backing by reserves of precious metals, and long-term stable or upward-trending

valuation against other currencies on a trade-weighted basis. With a strong currency, institutions and consumers will be able to buy foreign products and services at a low price and because of the low prices inflation may keep low. In addition, institutions and consumers will benefit when they travel to foreign countries since the goods and services in the foreign country would be much cheaper than the goods and services in their own country. Also, it will be easy for investors to purchase foreign bonds and stocks at lower prices. Most people and countries would prefer a strong currency, wouldnt they? However, having a strong currency does not always put the country at an advantage to other countries; it may also put the country at disadvantage. Take for example, a business owner in Antigua who wants to import water to run his business and has only Martinique and Dominica from which to import the water. Due to the fact that the Euro is 62 percent more
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than the EC dollar, it can be said that the Euro has a stronger value meaning that it has more purchasing power against the weak EC dollar. However, it is a disadvantage for the French innkeeper because the business owner in Antigua will import the water from Dominica to avoid the expense of the exchange. The purchasing power of the EC dollar to the Euro will decline since the EC dollar weakens against the Euro. Therefore, it can be said that the economy of both countries would be affected due to the value of their currency. From the example given above, it is plain to see that firms with a strong currency may find it difficult to compete with foreign countries due to the fact that the foreign countries want to buy goods and services at low prices. In addition, since the firms must compete with lower-priced foreign goods and services, the prices of their goods and services must be lowered or else they may not bought. Tourists from the foreign countries may find it too expensive to visit the country and therefore decide to go elsewhere. Also, it may be more difficult foreign investors to provide capital to the country with the strong currency in time of heavy borrowing .These disadvantages may devaluate the
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countrys currency or eventually bring down the GNP of the country if they continually happens.

Chapter Two
A weak currency may also be called a soft currency, and it is a currency said to be a less desirable form of payment than other currencies. Weak currency countries have frequent currency
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devaluations

against

currencies deficits,

of

major

trading

partners, These

balance of payment

or political

instability.

currencies generally trade at a discount in relation to currencies of economically developed countries. Foreign exchange dealers generally do not make markets in weak currencies, except for currency speculation. A dealer who expects a weak currency to decline in value may sell that currency short, making a profit from the difference in exchange rates. Acceptability of one currency versus another is dependent, of course, on local market conditions. The Portuguese Escudo, for example, may be a weaker currency than the U.S. Dollar, but its relative weakness may not be significant enough to discourage exporters from accepting it as payment. The values of soft

currencies fluctuate often, and other countries do not want to hold these currencies due to political or economic uncertainty within the country with the soft currency. Currencies from most developing countries are considered to be soft currencies. Often, governments from these developing countries will set

unrealistically high exchange rates, pegging their currency to a

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currency such as the U.S. dollar. Soft currency indicates a type of currency whose value may depreciate rapidly or that is difficult to convert into other currencies. With a weak currency, institutions and consumers face higher prices on foreign products and services therefore placing a strain on the currency and even increase the inflation rate. In addition, this may contribute to an even higher cost of living due to the fact the prices on foreign products and services are high. Institutions and consumers may also find it difficult to travel abroad because of the cost of travelling and the high price of goods and services in the foreign countries. Although most people believe that it is more beneficial to have a strong currency, weak currencies also have their benefits. For example, if a citizen from America decides to take a vacation, which country would that person visit and why? The citizen from American would visit a foreign country with a weaker currency than his country because it would be cheaper for him. It is logical that cheaper goods and services would be brought over the expensive ones therefore the weak currency would be at an
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advantage, standing a better chance against the stronger currency. From the example given above, it can be said that firms will find it easier to sell their goods and services in the foreign markets due to the fact that consumers chase cheaper goods and services. In addition, the firms may find it more competitive to keep the prices low since they are the ones with the low prices and the countries with stronger currency prices are always high. Foreign tourists would visit the country since they are able to afford, and as a result, increasing the money supply of the country. The capital market of the country would become more attractive to the foreign investors therefore, making it more expensive for them to buy stocks and bonds of the country.

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Chapter Three
Having knowledge about the determinacy of a currency is very important because the determinacy of a currency is what that may increase or decrease the currency. The demand and supply of a currency is really what determines a country's currency value. If a particular country's currency is in high demand by purchasers such as travelers, governments, and investors, this will increase the value of the country's currency. However, if the demand is low, the value of the countrys currency may remain the same or decrease. The factors that follow may have a positive or negative effect on the demand for a particular currency. The
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thirteen main factors that may determine a countrys currency are: The printing of a currency, Current State of the Economy, Prices of Foreign Goods, Political Conditions of a Country, How Secretive is a Country, National Debt of a Country, War and Terrorists Attacks, President's Popularity, Government Growth, Tax Cuts for the Consumer, Interest Rates, Housing Market and Positive or Negative Perception.

If a country prints an excessive amount of currency, more then what it normally would, this can decrease its currency value. Any time you have more than normal of anything; this results in a decrease in its value. This is true whether you are talking about currency or commodities such as iron ore, crude oil, coal, gold, silver and platinum. A large amount of currency in circulation can lower the value of a currency. A small amount of currency in circulation can result in the value of the currency increasing. If a country's economy is not doing well, this can decrease the demand for that country's currency. Specifically, here we are talking about the degree of unemployment, degree of consumer spending, and extent of business expansion that is taking place in a country. High unemployment, decrease consumer spending,
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with a decrease in business expansion, means a poor economy and a decrease in currency value. To conclude, the factors presented here are determinants of the degree of demand on a currency, and therefore determine its value. There are other factors such as manufacturing growth, degree of entrepreneurship in a country, employment growth, and even the weather and its effect on the agricultural industry, energy consumption, and local economies. These also can determine the demand for a currency. The factors listed here determine the perception that a potential buyer of currency may have. And here, perception means everything. How a potential buyer of a currency looks at a particular country using these parameters, will determine the demand on the currency, and ultimately currency value.

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Chapter Four
Devaluation is viewed as a sign of weakness, and the

creditworthiness of a country may be jeopardized.

Significant

problems that currency devaluation may cause are increasing the price of imports and stimulating greater demand for domestic products; devaluation can aggravate inflation. Inflation is a rise in the general level of prices of goods and services in an economy over a period of time. When the price level rises, each unit of currency buys fewer goods and services, consequently, inflation is also erosion in the purchasing power of money a loss of real value in the internal medium of exchange and unit of account in the economy. Inflation decreases the real value of money and other monetary items over time; uncertainty about future inflation may

discourage investment and saving, or may lead to reductions in investment of productive capital and increase savings in nonproducing assets. For example, selling stock and buying gold. This can reduce overall economic productivity rates, as the capital
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required to retool companies becomes more elusive or expensive. High inflation may lead to shortages of goods if consumers begin hoarding out of concern that prices will increase in the future. The government may have to raise interest rates to control that inflation, but at the cost of slower economic growth. An interest rate is the price a borrower pays for the use of money they borrow from a lender, for instance a small company might borrow capital from a bank to buy new assets for their business, and the return a lender receives for deferring the use of funds, by lending it to the borrower. Interest rates are normally expressed as a percentage rate over the period of one year. When interest rates rise, money becomes more expense. That, in turn, constricts demand for loans and increases the supply of money for loans. At higher interest rates, lenders are more prepared to offer loans while borrowers are more reluctant to take them. This is why the cost of the quality of goods and services produced which is economic growth will slow down.

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Chapter Five
In some cases a country may revalue its currency in response to a positive economic condition, to lower inflation or to please investors and trading partners. This would imply that existing currency increased in value as opposed to the case where a country issues a new currency to replace an old currency that had declined excessively in value. High rates of inflation are caused by growth of the rate of money supply. Changes in inflation are sometimes attributed to changes in real demand for goods and services or fluctuation in available supplies (that is changes in search) and sometimes of value of currency. As a result, this affects the business performance. A small amount of inflation is generally viewed as having a positive effect on the economy. One reason for this is that it is difficult to renegotiate some prices, and particularly wages, downwards, so that with generally increasing prices it is easier for relative prices to adjust. Many prices are "sticky downward" and
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tend to creep upward, so that efforts to attain a zero inflation rate (a constant price level) punish other sectors with falling prices, profits, and employment. Efforts to attain complete price stability can also lead to deflation, which is generally viewed as a negative by Keynesians because of the downward adjustments in wages and output that are associated with it. More generally, because modest inflation means that the price of any given good is likely to increase over time there is an inherent advantage to making purchases sooner than later. This effect tends to keep an economy active in the short term by encouraging spending and borrowing, and in the long term by encouraging firms to invest. High inflation, though, tends to reduce long-term capital

formation of the business firm by hurting the incentive to save, and to effectively reduce long-term spending by making products of the business firm less affordable. However, if the inflation rate is low, the government would not have to increase interest rates to control inflation. There would be rapid economic growth and the creditworthiness of the nation wouldnt be jeopardized because revaluation is viewed as a sign of economic strength.
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Also,

revaluation

encourages

investors

confidence

in

the

countrys economy and the countrys ability to secure foreign investments.

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Conclusion
It is now well known that fluctuation of the power of currency ( value of currency) has both negative and positive effects. This has been shown based on every possible economic status of a country, which means while the value of currency value is high (during revaluation) and while currency' value is low (during devaluation). A strong currency and weak currency both have their advantages and disadvantages therefore a country needs to take advantage of the strengths of their currency in order to increase its economic growth. Although the demand and supply of a currency is really what determines a countrys value, there are other specific factors that are just as important and this factors need to be take in consideration if an individual wants to know the value of a currency with respect to other monetary units. Devaluation and revaluation of a currency may have many impacts on an economy however only a few impacts were mention. Revaluation of a currency may be seen as a way to
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strengthen

an

economy.

However,

not

just

because

the

devaluation of currency may be as a sign of economic weakness doesnt mean that the economy is worthless, the economy cab be stimulated by increased foreign demand.

Bibliography
Hardwick Philip, Langmead John, and Khan Bahadur. An introduction to Modern Economics, 5th edition, United kingdom: Preston Hall,1999. http://www.pearsoneduc.com Lipsey G. and Chrystal A. Economics,10th edition, United States: Oxford University Press, 2004. Ebert J. and Griffen W. Business Essentials, 6th edition,New Jersey: Prentice Hall, 2007. www.thecurrencyhouse.com http://www.google.dm/search?q=currency+devaluation&ie=utf8&oe=utf-8&aq=t&rls=org.mozilla:en-US:official&client=firefox-a http://www.google.dm/search?q=currency+revaluation&ie=utf8&oe=utf-8&aq=t&rls=org.mozilla:en-US:official&client=firefox-a http://www.google.dm/search? q=determinants+of+currency+value&ie=utf-8&oe=utf8&aq=t&rls=org.mozilla:en-US:official&client=firefox-a http://answers.yahoo.com/question/index? qid=20080423070056AAVG5Jx

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http://www.ehow.com/about_5457141_affects-currency-rates.html http://www.economicswebinstitute.org/glossary/exchrate.htm

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