Introduction
Finances and exchange rates play a substantial role in the functioning of the international market while ensuring the circulations of goods and services. The importance of these economic matters cannot be underestimated, as the currency devaluation caused by the fluctuations in the exchange rates could be regarded as a cultivator of the export activities of the domestic manufacturers (Chen & Hou, 2007).
Meanwhile, this aspect is a critical attribute of protectionism approach, as it ensures the minimization of the foreign competition and provides favorable conditions for the advancement of the local producers (Robbins, 2005). Meanwhile, the rise of the currency in value is beneficial for the consumers and overseas companies due to a plethora of alternatives and the possibility to gain market shares (Robbins, 2005).
It could be said that the depicted aspects portray the paramount involvement of the currency devaluation and exchange rates in the politics of countries while affecting the prosperity of the social segment and its stability.
Based on the importance of the exchange rates and its potential influence on the occurrence of the deflation, the proposed concept implies that the currency devaluation has a positive impact on the financial stability of national producers while minimizing the intensity of competitive rivalry and an adverse effect on consumers due to the fluctuations of prices and limitation of choices. Meanwhile, the external and internal factors such as the orientation of national politics, changes in the economic stages, and actions of the other participants of trade drive the development of this economic issue due to the interdependence of the components in the global marketing arena.
Consequently, the primary goal of the paper is to offer the insights related to the presented economic concepts while providing the theoretical approaches to support the existence of the economic phenomenon. Furthermore, the principle is analyzed from supply and demand sides of the issue since it determines the effects of devaluation of currency on individual consumers and national producers.
The real business cases are assessed as the examples to support the ideas described in the concept, and the areas for the future implications are identified. In the end, the conclusions are drawn to summarize the core findings of the paper and emphasize the importance of the described matter.
Theoretical Framework
Devaluation of Currency and Domestic Producers
Meanwhile, it is critical to understand the theoretical principles, which determine the functioning of the concept in the modern business world. In this case, the interrelationship between the devaluation of the currency, exchange rates, and profitability of domestic producers have to be determined. A connection between the devaluation and the exchange rates has to be described to understand the mechanism of the principles of the devaluation.
In this case, the devaluation is often utilized a national policy to reduce the value of currency to enhance the possibilities for exchange (Owen, 2005). Meanwhile, the devaluation is an applicative deliberative concept of the reduction of the value of the national currency in the fixed exchange rate system (Mastrianna, 2013). The mechanism of the fixed exchange rate is unpretentious, as it implies the fixation of the national’s currency value in comparison to other currencies operating in the market.
It could be said that the principles of currency depreciation are analogous, but their concept implies changes in the currency values in the floating exchange rate system. Nonetheless, the floating exchange rate can be determined by the possibility to respond to the fluctuations of the value of other currencies presented in the market while selecting the beneficial path to the national prosperity (Mastrianna, 2013).
In turn, the impact of devaluation on the profitability of domestic producers has to be highlighted due to its necessity in the understanding of the concept. Regularly, this model cultivates an increase in exports while accumulating their competitiveness in the foreign market due to the declined production costs and prices caused by the devaluation in short-term (Bitros & Karayiannis, 2013). On the contrary, the enactment of this policy has a deleterious impact on the imports while being a reason for the intensified rivalry among the domestic producers and decreasing the market shares of the competitors (Bitros & Karayiannis, 2013).
Nonetheless, despite the optimistic expectations of devaluation in short-run, its efficacy in a long-term is reliant on the current elasticity of the goods, as, the commodities with the lack of elasticity might not experience an elevation in the exports, as this procedure is directed at the elastic products principally (Bitros & Karayiannis, 2013).
It could be concluded that the devaluation has a positive influence on the efficiency of the domestic manufacturers and service providers, as the execution of this concept refers to the enlargement of market shares, enhancement of the brand image, and the profit maximization. These improvements can be achieved with the assistance of exports and decrease in the presence of the foreign producers in the national market. The utilization of this policy has to be assessed before the actual implementation due to the correlation of the export rates and the elasticity of demand.
Money, Devaluation, Exchange Rates, and Consumers
Despite the substantial role of the domestic producers in increasing country’s GNP, the contribution of the demand side cannot be underrated, as consumers are the drivers for the increasing production margins and innovation. Meanwhile, the actions of the customers are vehemently affected by various external factors including exchange rates. The fluctuation of the states of the expenditure and income define the investment in the particular areas of infrastructure while being a potential cause of the limited services required for the well-being of the citizens (Froeb, McCann, Ward, & Shor, 2008).
Simultaneously, the potential changes in the consumer behavior are pertained to devaluation and depreciation of the currency, as this economic concept causes the limitation of alternatives while deteriorating the threat of the substitutes to producers. In this case, the consumers have to face the constraint of choices due to the possible decline in the foreign rivalry (Froeb et al., 2008). Meanwhile, the imposed depreciation or devaluation has an adversative effect on the financial stability of the consumers with debt and mortgages due to the unpredictable changes in prices while causing an escalation in inflation rates (Froeb et al., 2008). The dynamics mentioned above affect the economic constancy of the consumers while diminishing the level of prosperity and well-being of the individual users.
In the end, it could be said that consumers are important components of the economic system, and their response to the fluctuations of the environment reflects the functioning of the overall economy. Nonetheless, the theoretical principles highlighted in this section depict that the proposed concept has an adverse influence on the consumer’s choices due to the limitation of the possible alternatives. It could be concluded that the upsurge in the inflation rates, vacillations of the interests for mortgages, and the deficit of the products are the primary consequences of devaluation and depreciation of the national currency, which can be illustrated while being executed within the incompatible economic cycle.
Practical Application
Impact of Depreciation on Domestic Producers: Examples in Food Industry in the USA
The previous section depicted the scientific doctrines, which define the impact of devaluation on the domestic producers while utilizing the situations, which were present in the food industry in the United States of America. It is apparent that the United States is highly reliant on the imported goods and services, as the production of the country is limited to the particular spheres (Heerman, 2015).
Meanwhile, the production industry has a vehement correlation with the agricultural sector while any fluctuations in currency have a critical influence on the trade balance (volumes of exports/imports) and financial stability of the American economy (Heerman, 2015). Nowadays, the country is engaged in trade with China, Mexico, Canada, Eurozone, and others, and this fact implies the dependence of the actions on the foreign currency exchange rates (Heerman, 2015).
In this instance, the practical application of the described principle with be revealed in the examples of appreciation and depreciation of US dollar and the effect of these changes on the trade possibilities of the local producers. The depreciation strategy implemented in the past years helped the national companies to overcome financial constraints while being a potential cultivator for growth, and improved performance (Desai, Foley, & Forbes, 2008).
Meanwhile, the local producers still experienced hardships, as the presence of FDIs was dependent on the various external factors including the actual currency exchange and disinflation (Desai, Foley, & Forbes, 2008). In this instance, the past situation presented in the food industry in the United States of America implies that the application of depreciation strategy might not have a direct effect of FDIs, but the competition tends to decrease while ensuring the stability for the future development and exports.
Since 2014, the dollar experienced appreciation while being higher than trading currency by 4-7% (Heerman, 2015). This matter has a critical influence on the frequency of FDI, as the current U.S market is associated with financial stability and safety (Heerman, 2015). Logically, this matter causes the threat to the local producers due to the continuously cumulative intensity of competition and attractiveness of the industry to the foreign investments.
Despite the overall negative effects on the stability of the national producers, the appreciation does not affect different segments equally, as the price of the goods and exchange rate is based on the supply and demand forces (Heerman, 2015). This method contributes to the understanding of the variances in opportunities in the pricing of different raw materials in the selected segment, as the producers pay substantial attention to the differentiation strategy and quality control procedures (Heerman, 2015).
In the end, it could be submitted that the examples underline the applicability of one of the concepts in the context of the food industry while underscoring the existence of this interdependence in the real world. Nonetheless, it was revealed that the outcomes of depreciation and appreciation are dependent on the various external factors. Meanwhile, the application of the established concept contributes to the design of the particular strategic concept to select the most appropriate period for expansion.
Depreciation and Consumers: Practical Examples in Food Industry in the USA
The devaluation has a tendency to affect the consumer buying behavior and choices, the theoretical section revealed. Nevertheless, it is vital to portray this correlation with the assistance of the practical examples from the food industry in the United States, as this approach will determine the applicability of the concept in the business situations while using American market as an example.
Firstly, due to the well-developed agricultural segment, the United States of America is dependent on the extended range of suppliers, who operation in other currencies in different sections (FoodDrink Europe, 2015). Nonetheless, the trading relationships with the EU cannot be underestimated, as the region exports 14.566 million EUR to the USA (FoodDrink Europe, 2015). This factor underlines the US dependence on Euro while the examples from the past state that the depreciation of dollar to euro leads to the reduced volumes of the imported goods to American market while limiting choices and increasing prices (Keithly, 2015).
In this case, an inappropriate application of the depreciation strategy is presented by Bush administration, as the utilization of the depreciation, which was aimed to increase the revenues generated from taxpayers, led to the substantial and vehement upsurge in inflation rates in the different spheres including food industry (Keithly, 2015). Subsequently, the inflation increased the prices for mortgages and interest rates while decreasing the affordability of the imported products.
Summarizing the outcomes, it has to be mentioned that the proposed concept has a frequent occurrence in the business activities while being an important component in the formation of the interdependence between supply and demand curves. Based on the aspects depicted above, it could be stated that the functioning of the food market in the United States is dependent on the majority of the foreign suppliers (Heerman, 2015). Nonetheless, the trading relationships with EU have a critical influence on the availability of choices for the customers (Heerman, 2015). In the end, any fluctuations of currency have an adverse impact on the consumer behavior while causing a limitation of alternatives and potential dissatisfaction of their needs and demands.
Application of the Concept in the Business World
The theoretical basis and practical examples provide a profound understanding of the functioning of the currency exchange and monetary mechanisms while being involved in the international trade. Nonetheless, it is of supreme significance to discover the applicability of the proposed concept in the dissimilar business situations, which occur on the regular basis and define the economic situation globally. This section will contribute to understanding and definition of the potential implication strategies to enhance the current economic condition in the countries, who experience difficulties due to the fluctuations of the economic cycles and dependence on the currency exchange rates.
It could be said that the understanding of this concept will have a beneficial influence on the national expenditure and increase the stability and strength of the domestic producers. In this case, it could be utilized by the governmental authorities and policy makers, as they can affect the national strategy of the country and monitor the possibility of devaluations in the case of necessity to protect the domestic manufacturing segment and increase the reserves of particular currencies and minerals.
In turn, the findings and concept can be used by companies, organization, and entrepreneurs, who are seeking the export and expansion opportunities. The possibility to conduct analysis will assist the company in the understanding its export chances and define the favorable conditions for these strategic actions. Simultaneously, the constant analysis of the industry will minimize the losses associated with the strategic planning and budgeting, as the trends in the exchange rates will define the competitiveness of the company in the foreign market (Desai, Foley, & Forbes, 2008).
In the end, a vast applicability of the concepts contributes to the understanding of its paramount essentiality for the sufficient and smooth functioning of the economic system in the world. Nonetheless, a wrongful application might lead to the destructive consequences and the questionable financial position of the country in the global arena, and this aspect can be regarded as a primary reason for the continuous assessment of the current situation. Meanwhile, the governmental authorities of the country have to understand that the depreciation of the national currency has an influence on the economic stability of trading partners while being a reason for the changes in trade balance (Bahmani-Oskooee, Harvey, & Hegerty, 2013).
Conclusion
In the end, the essentiality of the devaluation and exchange rates cannot be underrated it can replace the necessity for the introduction of the sophisticated protectionist policies while being implemented efficaciously. It was revealed that the depreciation and devaluation strategies are utilized to improve the values of the domestic currency while being applicable in different exchange rate systems.
Initially, it was claimed that the application of the selected principles has a positive impact on the profitability of the companies while decreasing their costs in the short-run. Meanwhile, these concepts define the most suitable time for the exports, which the companies use as their expansion strategy to the foreign markets. Despite the positive projections in the theoretical framework, the practical example of the America industry portrayed that the presence of the FDIs is defined by various externalities. In turn, the profitability of some food producers might be positive due to the dependence of the trade on supply and demand side.
Speaking of consumers, it was originally highlighted that the usage of currency devaluation has an adverse influence on consumers due to inflation and limitations of spending. It could be said that these concepts were proved in the practical examples, as the application of the depreciation of the domestic currency in the past had an adverse influence on the behavioral patterns. Based on the factors mentioned above, it could be summarized that the exchange rates impact the availability of the choices for consumers and financial stability of the domestic producers, as any alterations cause a change in the wellbeing of the nation. Nonetheless, the externalities have to be considered, as they have a tendency to affect the equilibrium of supply and demand, trade balance, and the frequency and popularity of FDIs.
In this instance, it could be said that the discovered and described concept can be utilized by business analytics, private companies, and governmental authorities to modify the flow of the currency exchange in the national economy. The firms can monitor the exchange rate fluctuations and determine the most suitable time for expansion. Meanwhile, analytics and governmental authorities can utilize it to improve the position of the country in the global arena while selecting the relevant minerals and currencies for purchase to improve the condition of the national reserve.
References
Bahmani-Oskooee, M., Harvey, H., & Hegerty, S. (2013). Currency depreciations and the U.S. – Italian trade balance: Industry level estimates. Research in Economics, 67(3), 215.
Bitros, G., & Karayiannis, A. (2013). Creative crisis in democracy and economy. Berlin, Germany: Springer-Verlag.
Chen, T., & Hou, C. (2007). The political economy of trade protection in the Republic of China on Taiwan. In T. Ito & A. Krueger (Eds.), Trade and protectionism (pp. 339-360). Chicago, IL: The University of Chicago Press.
Desai, M., Foley, F., & Forbes, K. (2008). Financial constraints and growth: multinational and local firm responses to currency depreciations. The Review of Financial Studies, 21(6), 2857-2888.
FoodDrink Europe. (2015). European food and drink industry. Web.
Froeb, L., McCann, B., Ward, M., & Shor, M. (2008). Managerial economics. Mason, OH: South-Western Cengage Learning.
Keithly, D. (2015). The USA and the world 2015-2016. Lanham, MD: Rowman & Littlefield.
Mastrianna, F. (2013). Basic economics. Mason, OH: South-Western Cengage Learning.
Owen, J. (2005). Currency devaluation and emerging economy export demand. Burlington, VT: Ashgate Publishing Ltd.
Robbins, D. (2005). The handbook of public sector economics. Boca Raton, FL: Taylor & Francis Group.