Economics – Exchange rates | e-Consult
Exchange rates (1 questions)
Revaluation of a Fixed Exchange Rate: A revaluation occurs when the government decides to raise the fixed exchange rate. This means the currency becomes more valuable in relation to other currencies. In the diagram, a revaluation is represented by shifting the supply curve to the right. This indicates that the country is willing to supply more of its currency at any given price (exchange rate).
Impact on Exports and Imports (Revaluation):
- Exports: A revaluation makes UK exports more expensive for foreign buyers. This is because foreign buyers now need to spend more of their currency to buy the same amount of UK goods. As a result, the quantity of UK exports will likely decrease.
- Imports: A revaluation makes imports cheaper for UK consumers and businesses. UK buyers can now buy more foreign goods with the same amount of UK currency. Therefore, the quantity of UK imports will likely increase.
Devaluation of a Fixed Exchange Rate: A devaluation occurs when the government decides to lower the fixed exchange rate. This means the currency becomes less valuable in relation to other currencies. In the diagram, a devaluation is represented by shifting the demand curve to the left. This indicates that the country is willing to supply less of its currency at any given price.
Impact on Exports and Imports (Devaluation):
- Exports: A devaluation makes UK exports cheaper for foreign buyers. Foreign buyers can now buy more UK goods with the same amount of their currency. As a result, the quantity of UK exports will likely increase.
- Imports: A devaluation makes imports more expensive for UK consumers and businesses. UK buyers need to spend more of their currency to buy the same amount of foreign goods. Therefore, the quantity of UK imports will likely decrease.
In summary, a revaluation tends to reduce exports and increase imports, while a devaluation tends to increase exports and decrease imports. The overall impact on the UK's balance of payments depends on the relative magnitudes of these effects.