Question

Explain how a depreciation of a country’s currency can affect the economy of the country.

Answer 1

When a currency depreciates, the prices of products manufactured domestically decline compared to foreign prices. The manufacturing businesses are getting more competitive, and exports are growing. If export growth is substantial, then production and employment will also expand and the whole economy will accelerate. That is why countries often seek to trigger their currencies to depreciate to boost the economy

When it does, the cost of supply will rise as the currency depreciates and the economy won't become more competitive. For example, if a garment company purchases all of its textiles, then as the currency depreciates the expense would increase. It wouldn't be more successful. This may be capable of converting to domestic textile use, but this is a long cycle and it may not even be feasible because there are no domestic textile suppliers.

Currency depreciation will cause high inflation in countries that import many of their vital goods, such as food and fuels. The prices of these imported products are rising but they can not stop people buying them. In addition , high inflation produces an atmosphere of financial volatility and confusion which results in less economic activity. Inflation also creates political unrest, as people are unable to afford essential goods and often protest against the government in public.