Essay --

â€Å"Currency devaluation is typically an event resulting from a policy (political) decision and is most often associated with the nations that elect to â€Å"fix† the exchange rate for domestic currency in relation to another nation’s (or region’s) currency or some other fixed standard† (Owen, 2005). In other words, devaluation occurs in a situation when a country is operating under a fixed exchange rate regime and its government decides to lower the value of its currency in relation to the currency it is pegged against. In the case of Venezuela, the bolà ­var fuerte is pegged against the US dollar. A government objective generally associated with devaluation is the improvement of a trade deficit. If a country’s imports are greater than their exports, devaluing their currency can help, as it reduces the â€Å"purchasing power of domestic money in terms of foreign goods and increases the purchasing power of foreign money in terms of domestic goods† (Johnson, 1971). This in effect means domestic goods (exports) become cheaper and imports become more expensive, resulting in an increase in the demand for exports, with a fall in imports, and hence improving the balance of payments. Being South America’s largest oil-producing nation, Venezuela receives most of its export income from this industry. It therefore comes as no surprise that devaluation is so attractive to their policy makers as increased demand for their oil exports would allow them to accumulate more domestic monetary resources. However, an implication of this policy has been the negative effect on th e poor who spend the majority of their income on food and other basic necessities that are mainly imported goods. With inflation averaging between 20-30%, this has meant that fewer goods are... ... cites the theory of Mundel(1960) and says that, " According to this theory, it is impossible to simultaneously have a fixed exchange rate, free capital movement (an absence of capital controls), and an independent monetary policy. In conclusion, a currency devaluation whose primary aim is to improve the balance of payments has both its advantages and disadvantages. In the case of Venezuela, it has done more harm than benefited the economy. Even if the government were to try and borrow, very few investors would be willing to hold Venezuelan government debt as it would be deemed very unattractive and risky. Devaluation has in many cases been known to reduce the credit worthiness of an economy on the global markets. In the end, it could also result in an out flow of investments as investors may feel that the risk is too high for them when they invest in Venezuela. Essay -- â€Å"Currency devaluation is typically an event resulting from a policy (political) decision and is most often associated with the nations that elect to â€Å"fix† the exchange rate for domestic currency in relation to another nation’s (or region’s) currency or some other fixed standard† (Owen, 2005). In other words, devaluation occurs in a situation when a country is operating under a fixed exchange rate regime and its government decides to lower the value of its currency in relation to the currency it is pegged against. In the case of Venezuela, the bolà ­var fuerte is pegged against the US dollar. A government objective generally associated with devaluation is the improvement of a trade deficit. If a country’s imports are greater than their exports, devaluing their currency can help, as it reduces the â€Å"purchasing power of domestic money in terms of foreign goods and increases the purchasing power of foreign money in terms of domestic goods† (Johnson, 1971). This in effect means domestic goods (exports) become cheaper and imports become more expensive, resulting in an increase in the demand for exports, with a fall in imports, and hence improving the balance of payments. Being South America’s largest oil-producing nation, Venezuela receives most of its export income from this industry. It therefore comes as no surprise that devaluation is so attractive to their policy makers as increased demand for their oil exports would allow them to accumulate more domestic monetary resources. However, an implication of this policy has been the negative effect on th e poor who spend the majority of their income on food and other basic necessities that are mainly imported goods. With inflation averaging between 20-30%, this has meant that fewer goods are... ... cites the theory of Mundel(1960) and says that, " According to this theory, it is impossible to simultaneously have a fixed exchange rate, free capital movement (an absence of capital controls), and an independent monetary policy. In conclusion, a currency devaluation whose primary aim is to improve the balance of payments has both its advantages and disadvantages. In the case of Venezuela, it has done more harm than benefited the economy. Even if the government were to try and borrow, very few investors would be willing to hold Venezuelan government debt as it would be deemed very unattractive and risky. Devaluation has in many cases been known to reduce the credit worthiness of an economy on the global markets. In the end, it could also result in an out flow of investments as investors may feel that the risk is too high for them when they invest in Venezuela.