Eng Essay 2 Pt 3

8/3/2019 Eng Essay 2 Pt 3

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3/1/2010Instructor: Ms. Dalrymple

Writing Seminar (Eng 122-D)Class: G1

Topic: Impacts of the true value of acountrys currency (devaluation andrevaluation) have its economy.

Research Question: What effects does the value of acurrency (when it changes) have on an economy?

By: Vernella Bedminister


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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.

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Acknowlegement

The student wishes to thank all of her family and friendsfor encouraging and persuading her in theaccomplishment of this essay especially her best friend.In addition, the student is grateful to the people whodevoted their time to assist her. Not forgetting, herteachers Mr. Sanford and Mrs. Dalrymple for givingguidance and directions in the commencement andcompletion of the essay. Also, she wishes to expressmuch gratitude to Almighty God the Father for providingher with the knowledge, strength, patience, wisdom andunderstanding of the accomplishment of this essay.

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Table of Contentspages

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

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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.

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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 toanother. 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. Each currency has its own differences which

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

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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 exchangeissued 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

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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

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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 Frenchinnkeeper 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 of major trading partners,

balance of payment deficits, or political instability. These

currencies generally trade at a discount in relation to currenciesof 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 discourageexporters 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 forthem 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, HowSecretive 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 thedegree 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 ininvestment of productive capital and increase savings in non-

producing 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 isdifficult 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 stabilitycan 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 bestimulated by increased foreign demand.

Bibliography

Hardwick Philip, Langmead John, and Khan Bahadur. An

introduction to Modern Economics, 5 th edition, United kingdom:Preston Hall,1999.

http://www.pearsoneduc.com

Lipsey G. and Chrystal A. Economics,10 th edition, United States:Oxford University Press, 2004.

Ebert J. and Griffen W. Business Essentials, 6 th edition,New Jersey:Prentice Hall, 2007.

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Eng Essay 2 Pt 3