Business Studies – 6.2.4 Exchange rates | e-Consult
6.2.4 Exchange rates (1 questions)
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A currency devaluation is a deliberate reduction in the value of a country's currency. Here are two likely effects:
- Increased Exports: Devaluation makes exports cheaper for foreign buyers. For example, if Country X devalues its currency, its goods become less expensive for countries like the UK or US. This increased affordability can lead to a rise in demand for Country X's exports, boosting export revenue and potentially improving the trade balance.
Example: If Country X exports cars, a devaluation would make those cars cheaper for UK consumers, increasing demand. - Increased Imports Cost: Devaluation makes imports more expensive. For example, if Country X devalues its currency, it will need to spend more of its currency to buy goods from other countries. This can lead to higher costs for businesses that rely on imported raw materials or components. This can contribute to inflation.
Example: A Country X manufacturer importing components from Japan would have to pay more for those components after a devaluation.