5 Reasons Why a Country Wearing Devaluation At Its Currency
After the gold standard began to be abandoned by the world currency, the exchange rate began to float freely between one currency. As a result there are many situations in which a currency devalues a currency that will harm the citizens of the country itself. This has happened in Indonesia in the past. Devaluation is a decrease in the value of the domestic currency against foreign currencies.
The devaluation of this currency will lead to big waves around the world. Although it can cause a widespread fall within the country, there are still many countries that make decisions on the devaluation of their own currencies. Is the reason behind the devaluation decision to be done even if it harms its own citizens? Here are 5 reasons a country imposes its own currency devaluation.
In trading on the world market there is a tight competition between countries with other countries. An example is clearly visible on car manufacturers from American countries that will compete with cars from European countries and Japan. When there is a decline in the value of Europe against the dollar , the price of cars from Europe will be cheaper if bought with dollars, as well as the opposite. This makes exporters more competitive when trading in the global market. Exports must be encouraged while imports are reduced.
This is because exports will increase the demand for goods throughout the world so that the price of goods will rise to normalize the initial effects that occur due to devaluation. The second reason is that other countries that see this also do devaluations can also be to rival the country that be his opponent. This is what causes the currency war to lead to reduced inflation.
Minimize the trade deficit
Currency devaluation will increase export figures and reduce import figures because the value of imports will become cheaper and exports will become more expensive. This will certainly increase the profits that occur due to the increase in the balance of payments between the increase in exports and the decline in imports. This will also reduce a country’s trade deficit. The continuing trade deficit will lead to debt that is far more dangerous and can even paralyze the economy. If a devaluation is carried out, it will be able to help balance the country from the gap between exports and imports.
Reducing debt burden
Weak currency policies will make payments more effective and cheaper over time. Especially if payments are made regularly and regularly. Devaluation strategies must be carried out with caution because many countries have debt in various forms. Devaluation will indeed benefit a country but if you are not careful it will cause a currency war. The tactic of currency devaluation will risk failing if a country has a larger amount of foreign bonds. This is because the payment of bonds will become more expensive. Evaluating this currency is usually used by a country to achieve a country’s economic policy. Weak currencies from a country around the world will be very useful to increase exports and reduce the trade deficit of the country.
Increase trade transactions
When a currency weakens it is expected to pump up export and import activities. This is due to the decline of currency value to a certain level will make domestic products more competitive and able to compete in the international market.
Increase domestic consumption
Domestic consumption can also increase after a devaluation occurs. If the price of the product is felt more affordable then the domestic consumption will also increase.