Benefits of Reducing the Value of a Currency

Readers Question: What is the benefits of reducing the currency of some country?

Reducing the value of a country is better known as a depreciation or devaluation. It means that the currency will buy less foreign exchange. But, people from other countries will find it cheaper to buy the currency.

1. If there is a devaluation in a currency (such as the dollar for an example) there are many advantages.
2. Exports will be more competitive. Therefore, increase in demand for exports.
3. Increased exports will help boost job creation, aggregate Demand and boost economic growth.
4. Reduce current account deficit. If exports are more competitive, more will be sold. Assuming demand for exports is relatively elastic, there will be an improvement in the current account.

In the US, the economy is facing the threat of recession, therefore, a devaluation is particularly helpful for stimulating domestic demand and creating jobs in the export sector. The devaluation may also go someway to reducing the large US current account deficit.

The benefits of a depreciation would be a lot less if the US was facing inflationary growth. In these circumstances a depreciation would tend to make things worse.

See also:

• Effects of devaluing dollar