Question

Suppose a country devalues its currency to adress a balance of trade issue, what might the issue be.How is this policy suppose to work to achieve the desired result

Answer 1

• The issue that the economy is facing must be a trade deficit where import exceeds export.

Currency devaluation means decrease in value of country's currency under fixed exchange rate system. When value of a country's currency decreases, it will make export more competitive and appear cheaper to foreigners. This will increase the country's export. But, because of the devaluation of currency, import becomes more expensive and the county's import demand Declines. Thus, the policy help the economy to get the desired result by increasing export and decreasing import.

***Note that, Balance of trade = export - Import