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Currency is the most convenient form of settling trade
transactions, whether at a simple level between a buyer and seller or a
complex level between countries. Each country has its currency, and its
value is measured in relation to an international currency such as the
American dollar or the pound sterling. This linking enables countries to
engage in international trade either directly with the United States or the
United Kingdom or indirectly with other nations through them. Currency
valuation is critical in settling payments for exports, imports, and
services.
A country's financial authority can alter the value of its
currency relative to other currencies based on the strength or weakness of
its balance of payments. However, currency devaluation requires a lot of
tact and prudence. For instance, about two decades ago, an American dollar
was equivalent to about S$3, meaning that a dollar worth of goods was equal
to three Singapore dollars worth of goods. However, due to a change in the
balance of payments, the dollar was devalued to an equivalent of S$1.75
today.
The primary reason for devaluation is to discourage the
importation of foreign goods or services when a country experiences a trade
deficit. If the inflow of foreign goods is high, then the cost of imports in
terms of local currency will increase, discouraging people from buying
foreign services or goods. This increases the internal economy's production,
particularly for essential goods that locals can produce. Devaluation of
luxury goods prices makes them less attractive to locals, but foreigners may
find them cheaper to buy in their currency, which may encourage the
expansion of export trade, creating new markets.
Furthermore, devaluation may make it advantageous for
foreign investors to invest in the devaluing country. Their investment may
get an artificial boost, leading to an increase in foreign money inflows
into the country. As a result, it may not be profitable to take out money in
foreign currency, leading to the ploughing back of the funds into the
country's economy.
However, devaluation must be handled with caution;
otherwise, it could wreak havoc on a country's economy and shake the
confidence of foreign investors, damaging the country's prestige. The
devaluation could make foreign goods more expensive, creating an indirect
effect of incentivizing increased production and local consumption of
locally made goods.
In conclusion, currency devaluation can have positive or
negative effects on a country's economy, depending on how it is handled. It
can lead to increased exports, an influx of foreign investment, and
encourage local production, but it must be done with caution to avoid
wrecking the economy, shaking foreign investors' confidence, and hurting the
country's prestige. |
