Effects of the Devaluation or Appreciation of Currency on Great Britains Financial Performance - Assignment Example

A critical evaluation of the effects of the devaluation/Appreciation of currency on Great Britain’s Economic and Financial Performance by Name       Code+ Course Name Professor’s Name University Name City Date Introduction A financial crisis is a situation in which the monetary value of institutions and assets decrease suddenly and quickly (Arnold, 2008, P. 3). These scenarios are then followed by a rush of investors to sell off their properties and or remove their money from financial institutions. This rush is motivated by the perception that the value of the property and or the assets will decline, leading to losses. The world has experienced many financial crises over the past century. While it is difficult to determine the actual causes of financial crises, some factors have been known to contribute significantly to these losses. The factors include imbalances in the micro-economy and shocks, both internal and external (Arnold, 2008, P. 54l). History has also taught us that most financial crises are experienced due to spills in financial markets, looming asset busts and factors such as fire sales which are closely linked to periods of financial distress. The global financial crisis that hit the world by storm in the years 2007-2008 is, according to many, one of the worst since the depression (Carbaugh, 2012, P. 34). It resulted in the liquidation of huge financial institutions and its effects are still being felt both in the developed and developing nations. According to reports by analysts, the global financial crisis emerged as a result of the housing markets in the United States. Great Britain is one of the G20 nations that were severely affected by the global financial crisis. It resulted in the sharp decline of the housing prices in cities such as London and this led to a massive sell offs in the beginning of the crush. Banks such as the Northern Rock were the first to feel the heat and had to be bailed out by the government (Carbaugh, 2012, P. 45). Even though Gordon Brown, the-then prime minister was able to save the banks, experts are still pessimistic as to just how much was saved. The effects of the financial crisis on Britain are also evident in the value of the pound as compared to other currencies in the Eurozone. Its value has declined. It also led to the recession, which according to experts will continue for a while. This paper looks at appreciation or depreciation of currency as a measure to curb global financial crisis. The paper gives an in-depth analysis of the possible actions to be taken by Great Britain in order to induce an appreciation or a depreciation of the currency and the implications of such actions on the financial and economic performance of Great Britain. Introduction Appreciation of currency and its implications An appreciation in currency signifies an increase in its value (Ferrington, 2007, P. 12). The influence of appreciation on an economy is dependent upon export and import price elasticity. In an economy such as Great Britain which is in recession, an appreciation will lead to a decline in aggregate demand, hence in essence will worsen the already-bad employment situation. If, however, an economy was experiencing a boom, an appreciation will lead to a decline in inflation and help limit the growth rate. This can be of great significance since most financial crises in history are experienced immediately after a great economic boom. Financial and Economic Implications An appreciation in currency will lead to an increase in the cost of the exports of Great Britain’s goods and services. High prices will force European countries to buy exports from other countries as they seek better prices (Ferrington, 2007, P. 24). This will lead to a decline in the exports of Great Britain leading to a subsequent imbalance of trade. Imports will become less expensive. The average Briton will find it more economically beneficial to buy imported products than to buy goods and services offered within the country (Burrington, 2014, P. 23). With the cheaper costs, there will be a flooding of imported goods as retailers also attempt to supply products at competitive prices. With the imbalance of trade of imports being more than exports, it is expected that the rate of economic growth of the country will decline. An appreciation will also lead to reduced inflation rates within the country (Burrington, 2014, P. 26). The in flood of imported goods will cause a decline in the cost of goods and services as the business try to be competitive. The reduced AD will also cause a decline in inflation. Manufactures will also reduce the prices of their products as they try to minimize losses since the costs of exports will be relatively higher Devaluation of currency and its implications Devaluation occurs in a fixed exchange rate system and implies a decline in the value of money (lopus, 2013, P. 12). The impact of devaluation on an economy depends on a number of factors. Devaluation has the same meaning as depreciation only that it occurs in a fixed exchange system. These include the imports and exports demand elasticity. In situations where the demand of goods and services is not price elastic, a decline in the cost of exports will cause only a slight increase in the amount which may cause a decline in export values. In a situation such as which the economy is in recession as is the case with Great Britain, depreciation may not boost the export demand. The impact of depreciation may also be affected inflation. The influence of inflation on depreciation depend on factors such as whether or not companies transfer the import cost to consumers and the fact that inflation is not only affected by import costs . Financial and Economic Implications Depreciation will lead to exports becoming cheaper to foreign countries (lopus, 2013, P. 23). The foreign countries will hence buy more from Britain since it gives them an economic advantage. An increase in the number of foreign buyers will consequently have the effect of increasing the amount of exports by Great Britain to Europe and other countries. It will cause an increase in the cost of imports (Vidya, 2006, P.23). Higher prices for the imports will cause a decrease in demand for them hence the markets will be flooded by products and services from within the country. A higher demand for local products will also mean growth of local industries. Depreciation can also lead to increased economic growth. The growth will be as a result of an increased difference between exports and imports. This parameter is however dependant on the elasticity of demand (Vidya, 2006, P.24). Inflation will result from the depreciation (Michael & Shim, 2001, P. 23). The imbalance of exports and imports where exports supersede imports will stimulate cost-push inflation. As the difference between exports and imports increases, there will be a parallel steady rise in demand-pull inflation. As exports become more and more cheap, the manufactures will have no reason to cut down on costs hence it is possible that the prices for the goods and commodities will continue to rise. A positive impact perhaps of depreciation will be better current accounts. The high exports will help reduce the deficits of the current accounts (Michael & Shim, 2001, P. 52). Bibliography Arnold, R,.2008. Macroeconomics. . London, U.K.: Kogan Page Carbaugh, R,.2012. 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