Answer to Question #283722 in Macroeconomics for ABEX

Question

24. If country A’s major trade partners complain about the ’artificial’ devaluation of its currency, why this becomes an issue?

Answer 1

1.To Boost exports - In the world market today, goods from one country must compete favourably with those from all other countries. For example, car manufacturers in America must compete with car manufacturers in Europe and Japan. If the value of the euro decreases against the dollar, the price of the cars sold by European manufacturers in America will be effectively cheap than they were before.

2.To shrink trade deficits -

Exports will increase and imports will decrease due to exports becoming more cheaper and imports more expensive.

3.To reduce sovereign debt burdens -The government maybe forced to encourage a weak currency policy if it has a lot of government debts. If debt payments are fixed, a weaker currency make these payments effectively less expensive over time.