La Jolla Economics

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The Country Selector

September 29, 1997

Those individuals who still advocate devaluation as a viable currency policy believe a decline in the nominal exchange rate favorably alters a nation's terms of trade. In so doing; they argue; a devaluation enhances a country's competitiveness. But changes in nominal exchange rates may merely reflect changes in the price between two currencies; and have little or no affect on the real economy. And since the unit which prices between currencies are measured is what is being changed; domestic prices will adjust (increase) by the amount of the devaluation.

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