1. Devaluation Lesson aims: To know the difference between devaluation & revaluation and depreciation & appreciation To understand how devaluation affects imports and exports and the balance of payments To explain how devaluation impacts on pricing strategies To draw the J-curve

2. Recap/revision: 1.What is the ‘balance of payments’? 2.What is a current account surplus? 3.Deficit? 4.What do these mean if they are long-term? 5.How does a high exchange rate affect a) imports and b) exports? 6.What about a low exchange rate? 7.How are exchange rates set (what factors)? 8.What are the differences between a floating, fixed and managed or ‘dirty’ floating exchange rate?

3. Devaluation/revaluation The Government can devalue the currency – how might they do this? This makes exports relatively cheaper and imports relatively more expensive A fall in the value of a currency is called depreciation A revaluation puts the price and value of the currency up – it is also called appreciation How might The Government be able to do this? This has the opposite effects – imports are ‘cheaper’ and exports ‘more expensive’ to foreign consumers

4. Devaluation Use pages 484-485 to summarise the following effects/factors (10 minutes): a) Imports and exports (include examples) b) Elasticity c) Pricing strategies

5. Problems associated with devaluation… The J-curve – There is a time lag in changing the currency; So in the short-term (demand for exports and imports tends to be inelastic) the current account position gets worse before it gets better; This causes a dip in the current account position, as the revenue coming in goes down; In the long run, exports should appear cheaper and imports more expensive, improving the current account position

6. … Cost-push inflation – the increased exports and reduced imports can increase domestic inflation; This is because imports of materials becomes more expensive, pushing up the costs of domestic businesses; This could offset the benefits of the increased international competitiveness and cause a ‘cost-push inflationary spiral’

7. Question 1, p.485 Question 2, p.486

8. So… 1.What is devaluation? 2.What is revaluation? 3.What are the effects of a) devaluation and b) revaluation? 4.How is the impact of exchange rate changes affected by price elasticity of demand? 5.How may exchange rate fluctuations affect a business’ pricing strategies? 6.What is the J-curve? 7.How does devaluation cause cost-push inflation?