DEVALUATION, BEGGAR THY NEIGHBOR AND CURRENCY WAR FED TAPERING

Understanding the Relationship between Devaluation, Beggar Thy Neighbor and Currency War

DEVALUATION, BEGGAR THY NEIGHBOR AND CURRENCY WAR Let’s say an American wants to buy Indian products. Indian products can only be bought by paying in Indian rupees. This means that the American cannot buy the Indian product unless and until he buys Indian rupees.

DEVALUATION, BEGGAR THY NEIGHBOR AND CURRENCY WAR Therefore, if the Indian government reduces the value of the rupee, the American can get more Indian rupees for every US dollar.

DEVALUATION, BEGGAR THY NEIGHBOR AND CURRENCY WAR Let’s say earlier he would get Rs. 50 for every US dollar but after devaluation he gets Rs. 60 for every US dollar.

DEVALUATION, BEGGAR THY NEIGHBOR AND CURRENCY WAR This means that after devaluation the American for 1$  can now buy a product for Rs. 50 and another for Rs. 10 whereas before the devaluation he was in a position to only buy one product of Rs. 50.

DEVALUATION, BEGGAR THY NEIGHBOR AND CURRENCY WAR So clearly the buying capacity of a US dollar increases because of rupee devaluation.  

DEVALUATION, BEGGAR THY NEIGHBOR AND CURRENCY WAR Thus for the American the product which was costing $1 previously would now be available to him at less than $1.

DEVALUATION, BEGGAR THY NEIGHBOR AND CURRENCY WAR To understand how many dollars it would now cost him, let’s look at the following: If Rs. 60 = $1 Then Rs. 50 = $? The above equation means that Rs. 1 is 1/60th part of a dollar in value Hence Rs. 50 would be $(50 x 1/60) And this works to $ 5/6 = $.83

DEVALUATION, BEGGAR THY NEIGHBOR AND CURRENCY WAR From the previous explanation one thing that gets clear is the fact that whenever a country devalues its currency, its exports get cheaper and attractive.

DEVALUATION, BEGGAR THY NEIGHBOR AND CURRENCY WAR And when this happens, there is a possibility that America (as in this case where our example talks about America and India) would prefer buying products from India than let’s say its neighbors (who have not devalued their currency).

DEVALUATION, BEGGAR THY NEIGHBOR AND CURRENCY WAR This policy of devaluing currency is also known as “Beggar Thy Neighbor” because it has the potential of harming the economy of neighboring countries by making their exports less attractive and causing a reduction in their exports.  

DEVALUATION, BEGGAR THY NEIGHBOR AND CURRENCY WAR This in a sense sets up a sort of war between two countries for a higher export market share. This war is known as “Currency War”.

DEVALUATION, BEGGAR THY NEIGHBOR AND CURRENCY WAR Hope through this explanation you have now understood the following terms   Currency devaluation Beggar thy neighbor Currency wars

DEVALUATION, BEGGAR THY NEIGHBOR AND CURRENCY WAR It is important to understand at this point the difference between “Currency War” and “Price War”.

DEVALUATION, BEGGAR THY NEIGHBOR AND CURRENCY WAR In a “Price War”, two or more manufacturers resort to price cutting by reducing the price of their products. This happens within a country (domestic trade).

DEVALUATION, BEGGAR THY NEIGHBOR AND CURRENCY WAR A “Currency War” in essence is a “Price War” except that it is in the international context.

DEVALUATION, BEGGAR THY NEIGHBOR AND CURRENCY WAR Hope this story has clarified the Concept of Relationship between Devaluation, Beggar Thy Neighbor and Currency War

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