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Lowering the price of the currency .. What are its implications for the national economy?

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Lowering the price of the currency .. What are its implications for the national economy?

   Time: 12/20/2020 08:34:40 Read: 1,638 times

{Baghdad: Al Furat News}
The decision to reduce the value of the Iraqi dinar exchange against the US dollar caused a loud noise, and raised fears that the country would enter a stage of economic collapse, which has doubled the crisis that Iraq has been experiencing for years.

According to the Federal Reserve Bank of New York, it is possible for policy makers to devalue and revalue the value of a currency, which is usually associated with pressures from the domestic market.

The bank notes that the option to depreciate the currency can only be taken by the country's government or the monetary authority in it, represented by the central bank in many countries.

The devaluation of the national currency is defined as a deliberate downward adjustment of the official exchange rate, which leads to a devaluation in relation to other currencies.

According to the economic site "Investopedia", the world has witnessed many countries devaluating their currency, since economies abandoned their pegs to gold, and began to link them to other currencies or a basket of currencies.

Impact on exports and imports

The bank notes that devaluing the currency makes a country's exports less, relatively expensive to those outside it.

According to Investopedia, the devaluation of the currency makes the country's imports more expensive for the local consumer, which leads to the reduction of imports.

The devaluation is likely to cause psychological effects, weakening investor confidence in the country's economy, and negatively affecting the process of attracting foreign investments, according to the bank.

Potential economic growth

The Economics Help site indicates that the devaluation of the currency may lead to an increase in aggregate demand, which may lead, in some way, to an increase in the rate of growth in the country's economy.

The devaluation includes measures taken by the state to reduce the purchasing power of the currency strategically.

Investopedia notes that some countries may pursue such a strategy to gain a greater competitive margin in global trade and reduce the burden on the state's sovereign debt.

Nevertheless, devaluation is likely to have "unintended" consequences that lead to what the site describes as "self-defeating".

The site links an increase in exports and an increase in the demand for local products, which leads to more job opportunities and faster GDP growth.

According to the University of Toronto, Canada, lowering the value of the official exchange rate helps in some circumstances to transfer demand for specific goods and services from abroad to the interior to be reflected in the domestic product.

The increase in internal demand automatically increases the demand for local goods, which is reflected in the need for producers and distributors of these commodities and those working to sell them to provide more jobs, which reduces unemployment and provides a boost to the local market.

According to the university, devaluing the currency in some cases leads to an increase in income in the country, which will positively affect the labor market.

It is well known in the economics world that an increase in demand over supply leads to a rise in prices, while raising supply leads to lower prices,

meaning that the conditions imposed by the economy on the country's industrial and trade sector and the volume of production are what are likely to determine the effect of the currency devaluation on prices locally.

It is likely that these circumstances will generate a direct increase in the wages of the worker in the country that decided to devalue its currency, since the low currency will not constitute attractive conditions for a migrant worker to come to the country, which provides greater opportunities and options for the local worker in his country.

The "Economics Help" website gives an example about Britain when it decided to reduce the value of the pound sterling, which made migrant workers from Eastern Europe prefer to work in Germany over Britain, which forced local factories to raise their wages to retain foreign workers with them, or to offer more attractive offers to the local worker. .

The site indicates that wages may decline if the currency devaluation causes inflation whose rate exceeds the rates of wage increase.

China has repeatedly faced accusations of devaluing its currency in order to benefit more from its economy, and US President Donald Trump has been the most prominent critic of China on this issue.

Trump had accused China of "manipulating its currency" in light of the escalation of the trade war between Washington and Beijing last year, according to "CNBC".

Trump said at the time that "China has lowered the price of its currency to its lowest historical level ... This is called currency manipulation."

And China had allowed the yuan to reach its lowest levels in more than a decade, which made Chinese products less expensive, at a time when the United States had raised tariffs imposed on Chinese goods.

Hussein Hatem

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