International Finance

BUS 430

Case 1

1. Why must a country’s currency be devalued? What is failing in the economy?

The value of a country’s currency is often judged by weighing it against other countries’ currencies. If a country cannot maintain it’s fixed exchange rate, they would normally resort to devaluation of the currency. In order to maintain the exchange rate Venezuelan government must use there foreign currency reserves to buyback the bolivar. One of the many reason for currency devaluation are that of economic purposes, there could be a budget deficit or attempts to boost exports and increase revenue.

A key effect of devaluation is that it makes the domestic currency cheaper relative to other currencies. There are two implications of devaluation. First, devaluation makes the country’s exports relatively less expensive for foreigners. Second, the devaluation makes foreign products relatively more expensive for domestic consumers, thus discouraging imports.

Food prices are on the rise and becoming increasingly unaffordable. Devaluation leads to the increase of foreign currency reserve as the export will be higher than imports, this leads to the well being of the business firm to exchange currency.

2. What benefit did the Venezuelan regime in power gain from the repeated devaluation of the bolivar?

The Chavez regime used the devaluation of the bolivar to increase the domestic monetary resources it earns from its oil exports. With each devaluation one will receive more bolivar per dollar. The Venezuelan government will be earning more from oil sale and providing more for domestic spending.

3. By the time you read this you will know whether the analysts predicting the

future of the bolivar were correct. How did they do?

The analysts were right, just recently the Venezuela’s bolivar traded nearly 80% less than the fixed official exchange rate. There have been new developments in Venezuela economy in attempts of the government to make dollars...