Trying To Understand Currency Devaluation


I'll admit I'm no economist but hey, it doesn't mean I can't understand the basics of economics or the discussion of more qualified people right? As of late, China is having a currency devaluation. In my quest to understand whatever I can to preserve my mind from decay, I would try to get what I can to learn about the pros and cons of currency devaluation.

Currency devaluation on the upside means that the economy becomes instantly more competitive, that is the country becomes more competitive with its labor sector. This in turn will tends to generate more international demand for the locally produced goods, thus cranking up growth. On the other hand, it's also bad because it tends not to be neat and easily controlled. It can also create an inflationary spiral if the relevant economy also happens to be bumping against supply constraints. Import prices can increase which in turn can spur higher wage demands.

On the other hand, a currency appreciation is where it increases value to another currency. The effects can both be good and bad like currency depreciation. The positive side introduces both cheaper imports and lower inflation. Cheaper goods because the money can buy more from a foreign currency. Lower inflation makes imports cheaper, meaning spending less money on foreign goods. However the negative impact is when imports will exceed exports which is not good for the economy. My own understanding would be because the local goods from where the appreciation happens would look expensive to other countries.

In trying to understand the Philippines with its increase and decrease in gross domestic product (GDP), a depreciation in peso is not entirely a bad idea and appreciation in peso is not entirely a good idea. When I think about foreign firms seeking Filipino labor, remember companies want more affordable labor. If the Philippine peso appreciates, one can easily buy imported products at a cheaper price. However, it can also hurt the export zone because their prices may soon increase higher than usual and some people want cheaper goods. Since the Philippine peso is depreciating together with the Chinese yuan, then you might consider that maybe, Filipino-made products (whether they be local brands or foreign brands) would be competitive in the international market, something the Philippines badly needs to have a higher GDP.

It's just like how in business, you would want to have not only a reliable supplier but also a cheaper priced supplier. For example, I want to buy my supplies and I want to make sure that they are reliable. I start canvassing my suppliers and their reputation but I also want to know their prices. While I would avoid anything that's too good to be true because they might give me faulty supply but I would also want to make sure the prices are reasonable. So if Supplier A and B are both reliable but B is cheaper than A, I would certainly go for Supplier B.

So in short, both appreciation and depreciation are a case to case basis in an economic cycle. What I think would be good is that in the case of a currency appreciation, the Philippine-based companies may want to buy the necessary imported equipment and some materials needed. However, one must be careful not to overly import since the aim of every economy is to have more exports (sales) over imports (purchases). Which in turn, it might be time to depreciate the currency or two, when currency depreciates then it's time that exports increase (because of cheaper goods). A cycle of balance is what is needed to maintain a good economy.

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