International economics homework

 Countries may misallocate their resources in the form subsidies to the local firms. The allocations may lead to uneven distribution of resources that pose negative effects on a country’s economy.

A depreciating currency reduces a country’s net foreign debt. For instance, a fall in the dollar positively influences American economy. Dollars largely dominate American foreign liabilities, but the assets valued in foreign currencies. The fall in dollar increases American external assets and largely does not influence the value of its foreign liabilities. Fall in a currency like dollar that manifests international marketing leads to lowering of prices of international commodities. The move leads to changes in the prices of imports, which pose a direct effect on consumer price index. Devaluation of the currency like the sterling-dollar makes exports cheaper. The imports from a different perspective become more expensive causing cost-push inflation within an economy, which negatively affect a country’s economy.

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Overvalued currency poses a downward pressure on a country’s rate of inflation. The imported goods will be cheaper leading to increased units of imports as a positive consequence. Overvalued currency forces a country’s local producers to improve their efficiency to make them more competitive in the international markets. However, overvalued currency poses a negative consequence by making the exports uncompetitive in the international markets. In addition, the associated lowered prices of imports will make imports a preferred choice for consumers damaging the local industries.

From a different perspective, undervalued currency makes imports expensive for the consumers. this will make them opt for domestic goods increasing employment opportunities in the local firms.

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