competitive depreciation and devaluation

• What is competitive devaluation/depreciation?

  It is when a country intervenes in foreign exchange markets to lower the value of its currency.
• Why would a country want to devalue its currency?

  To provide a competitive boost to its exporting industries.
• How does a weaker currency affect exports and imports?

  A weaker currency encourages exports and discourages imports.
• What is the expected outcome of competitive devaluation on the balance of payments?

  The balance of payments should improve if the Marshall-Lerner condition is met.
• What is a potential negative consequence of competitive devaluation?

  It can cause inflation, which may reduce competitiveness.
• What might happen if a country with a surplus devalues its currency?

  Other countries are likely to retaliate by devaluing their own currencies.
• What is the effect of competitive devaluation on countries with a current account deficit?

  It is unlikely that other countries will follow and reduce their currency.
• What is the Marshall-Lerner condition?

  It is a condition that states the balance of payments will improve if the sum of the price elasticities of demand for exports and imports is greater than one.
• What does the Marshall-Lerner condition relate to?

  It relates to the price elasticities of demand for exports and imports.