“Currency devaluation is typically an event resulting from a policy (political) decision and is most often associated with the nations that elect to “fix” the exchange rate for domestic currency in relation to another nation’s (or region’s) currency or some other fixed standard” (Owen, 2005). In other words, devaluation occurs in a situation when a country is operating under a fixed exchange rate regime and its government decides to lower the value of its currency in relation to the currency it is pegged against. In the case of Venezuela, the bolívar fuerte is pegged against the US dollar.
A government objective generally associated with devaluation is the improvement of a trade deficit. If a country’s imports are greater than their exports, devaluing their currency can help, as it reduces the “purchasing power of domestic money in terms of foreign goods and increases the purchasing power of foreign money in terms of domestic goods” (Johnson, 1971). This in effect means domestic goods (exports) become cheaper and imports become more expensive, resulting in an increase in the demand for exports, with a fall in imports, and hence improving the balance of payments. Being South America’s largest oil-producing nation, Venezuela receives most of its export income from this industry. It therefore comes as no surprise that devaluation is so attractive to their policy makers as increased demand for their oil exports would allow them to accumulate more domestic monetary resources. However, an implication of this policy has been the negative effect on the poor who spend the majority of their income on food and other basic necessities that are mainly imported goods. With inflation averaging between 20-30%, this has meant that fewer goods are...
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... cites the theory of Mundel(1960) and says that, " According to this theory, it is impossible to simultaneously have a fixed exchange rate, free capital movement (an absence of capital controls), and an independent monetary policy.
In conclusion, a currency devaluation whose primary aim is to improve the balance of payments has both its advantages and disadvantages. In the case of Venezuela, it has done more harm than benefited the economy. Even if the government were to try and borrow, very few investors would be willing to hold Venezuelan government debt as it would be deemed very unattractive and risky. Devaluation has in many cases been known to reduce the credit worthiness of an economy on the global markets. In the end, it could also result in an out flow of investments as investors may feel that the risk is too high for them when they invest in Venezuela.
The net values of Belarus imported goods and services from other countries exceeded its export of goods and service to other countries creating a large Current Account Deficit. The reason Belarus a former Soviet republic scraped the currency trading restriction is due to the fact its political leadership allowed the Belarus national currency ruble to depreciate as part of a strategy to reduce the current account deficit. The unification of the exchange rates will allow the currency market ability to function as before. The overheated economy under a loose monetary policy created this crisis and the difficulties will be overcome by abolishing the restriction on currency trading. The political promise of 50% increase in wages to the government workers have impacted with no real values other than buying foreign currency and goods. According to Arkhipov and Abelsky (2011), abolishing the currency trading restriction is necessary given the current practice of doin...
So when the dollar is depreciating, the exchange rate becomes smaller. Exchange rate (foreign exchange rate, forex rate or FX rate) is the number of units of a given currency that can be purchased for one unit of another currency. The United States capital markets are becoming more attractive to foreign investors. Since the dollar is falling, it makes foreigner’s investment in the United States more affordable. Therefore, foreigners take this opportunity to invest in the United States.
Since the 1970s, Venezuela has gone from being South America’s richest nation into a nouveau-poor society in search of an identity. Once known as the Saudis of the West, Venezuelans have seen their economic fortunes decline in exact proportion to the general fall in world oil prices. Even so, Venezuela’s many problems were hidden from view until relatively recently, when severity measures heralded the sort of economic crises so painfully familiar to other Latin American countries. Runaway inflation, currency devaluations and even food riots have marked this new phase in Venezuelan history, to which the country is still trying to adjust.
Venezuela is considered a single-product economy at which petroleum represents the 97.8% of Venezuelan exportations; therefore, Venezuelan economy is highly dependent on the oil market. This high dependency is caused by the lack of incentives from the government to expand the production spectrum of Venezuela´s economy, plus the implementation of a currency exchange control since 2003. As a result of the country´s singular production, and the limited and scarce internal production of goods besides oil, Venezuela depends on importations to supply most of the goods needed by the population. Furthermore, because the Oil industry is managed completely by the government through the state-owned company PDVSA (Petróleos de Venezuela S.A.), the supply of dollars is provided mostly by the state.
To put it simply, the exchange rate is a price. As with any other market, price is determined by supply and demand. Whenever they are not equivalent, the exchange rate would change. However, the reality comes to be far more complicated.
Venezuela was one of the richest countries that emerged from the collapse of Gran Colombia in 1830 (the others being Colombia and Ecuador). For most of the first half of the 20th century, Venezuela was ruled by generally benevolent military strongmen, who promoted the oil industry and allowed for some social reforms. Democratically elected governments have held sway since 1959. Current concerns include: a polarized political environment, a politicized military, drug-related violence along the Colombian border, increasing internal drug consumption, overdependence on the petroleum industry with its price fluctuations, and irresponsible mining operations that are endangering the rain forest and indigenous peoples.
recently the U.S. supplied Mexico with a loan in order to save the falling value
This is a monetary policy which involves the government’s intervention to curb disorderly trends in the foreign currencies level. In case the quantity of a local currency goes down, the central bank uses the foreign currencies to buy its currency from the foreign economies. This ensures that the economy has ample home currency and thus enough money in circulation.
Eichengreen, Barry. Globalizing Capital: A History of the International Monetary System. Princeton, NJ: Princeton University Press, 1996.
Food shortages, high inflation rates, protest, and violence: one sees these headlines in a Google search of Venezuela today. All around the country, there are long lines to buy simple necessities, like bread and milk. High inflation rates lead to shortages of food supplies, which increase frustration leading to protests in the streets and, sadly, an increase of violence. The protests and violence result from the inability of Venezuelans to provide the most basic human needs for their families. Sky-rocketing inflation rates in Venezuela are the result of Hugo Chavez, the former socialist and revolutionary leader of the country, and his administration. While in power, Chavez was so consumed with fixing the social issues in Venezuela, that other aspects of the country were ignored – like the economy. In 2014, Venezuela is left with a destroyed economy, angry people, and a government that is trying to fix the many issues the country currently faces; although the government is committed to finding solutions, the people of Venezuela do not feel the government is fixing the problems fast enough.
...price and devaluation of the domestic currency to bring it back to A from A’ the country has to sell off its Foreign assets.
Exchange rate refers to the price of a currency in relation to another. In the floating exchange rate these prices are determined by the foreign market which fluctuates occasionally. The floating exchange rates have a great impact on a country’s economy and this might trigger its stability or instability. There is an automatic adjustment in case a country has a larger payment deficit which leads to continuous currency outflow from the country. Floating exchange rate allows the government to determine the interest rates and this allows the economy to expand as the country will be charging interests depending on the currency price. Since the currency changes randomly, the exchange rates also vary from time to time and therefore it can lead to a point of economic instability (McBrewster ‘et al’, 2010).
Fixed exchange rate which is at times known as pegged exchange rate is an exchange rate regime where a country’s currency value is fixed against the value of another currency or to another measure of value such as gold.
Venezuela's government has tried to deny economic reality with price fixing and currency controls. The idea was that it could stop inflation without having to stop printing money. All they had to do was tell businesses what they were allowed to charge, and then give them dollars on cheap enough terms that they could actually afford to sell at those prices (Obrien, 2016). The problem is, that it's not profitable for unsubsidized companies to stock their shelves, and not profitable enough for subsidized ones to do so either when they can just sell their dollars in the black market instead of using them to import products. That's left Venezuela's supermarkets without enough food, its breweries without enough hops to make beer, and its factories without enough pulp to produce toilet paper (O'Brien, 2016).
There is one thing that differentiates the international business with the domestic business where it uses more than one currency in the commercial transaction. For example, if a company from British purchases some goods from a company from US, the international transaction will require for exchanging pounds and U.S. dollars which involve the foreign exchange market. In the foreign exchange market, any country that wish to do business with foreign country, the country need to convert their domestic currency into the foreign currency that they are wish to cooperate with through foreign exchange.