Question

Can anyone explain why it is advantageous for countries to have its currency depreciated at a global level?

Answer 1

Exports of a nation are made more competitive in the global market with weak domestic currency and make imports expensive. Economic growth is stimulated by higher export volumes and pricey imports too have the same effect because local alternatives are generally opted by consumers as compared to imported products. If there is an enhancement in the terms of trade then there will be a reduction in the current account deficit, increase in employment and GDP. A weak currency is usually a result of the stimulative monetary policies, it might have a positive impact on the capital of the nation and housing markets, in turn, domestic consumption is boosted through the wealth effect.
Step 2: Reasons behind the devaluation of currency:
i). Boosting exports- In the global market, there must be a competition for goods of one country with the goods of all other countries. Exports are more expensive for purchasing in foreign markets with more valuable currency. There is a worldwide increase in demand for a country's exported goods this would result in a rise among prices, normalize the initial impact of currency's devaluation. And when other countries will see this effect is working then they will also lead to devaluing their currencies in kind in a race to the bottom.
ii). To reduce the trade deficit:
There will be an increase in exports due to exports becoming cheaper and a decrease in imports due to imports becoming expensive. This will lead to an improved balance of payment as a result of increasing exports and decreasing imports will lead to a decrease or shrink in the trade deficit. Devaluation of home currency might lead to a correct balance of payment and reduction of trade deficit.
iii). To decrease the sovereign debt burden - A government may take initial to devalue the currency if it has a lot of government-issued sovereign debt to service on a regular basis. If payment of debts is fixed then a devalued currency will make the payments less expensive.
Thus countries can devalue their currency to achieve economic policy. A country having weaker currency as compared to other countries can help to boost its exports, reduce the trade deficit, reduction in the cost of payment of interest on its outstanding government debts. Sometimes it may be very dangerous leading to much more harm than good.