Monetary Devaluation

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MONETARY DEVALUATION Like every other product the coin of a country has a price, which is the exchange type; this represents the quantity of Mexican pesos that are needed to buy an American dollar, and like every other price this one is determined because: a) Because of the offer and demand of dollars, or b) Because of the monetary authorities of the country.

The origin of the exchange types comes from the necessity that residents of one country have to buy another country's money in order to cover their international debts. In Mexico's case, residents demand dollars to buy goods and services from the exterior (imports); the offer of dollars comes from the selling of goods and services to the exterior (exports) as well as the income of capital such as foreign savings or direct investment. When imports and exports are not balanced the offer and demand of dollars is altered, which can also be affected in a short time for speculative reasons or simply as a precaution.

MEXICO'S CASE: The changes in the economical situation of our country or in the ones with whom we realize mostly the exchange of goods and services, affect the behavior of demand and offer of dollars and as a consequence its price. If in Mexico the exchange type maintains fixed and the tendency of high prices is bigger than that one of the countries with whom we handle business normally, we will have a relative expensiveness of our goods and services with respect to the foreign ones. At the same time, foreign products will be cheaper to us. This situation provokes an increment in imports, carrying the demand of dollars, while the offer reduces as exports weaken. To stop this unbalance between offer and demand and not devaluating the coin, the government goes to external credit, establishes control over imports, subsides exports, etc… A situation of this type cannot maintain undefined. A way to correct this unbalance is to devaluate the coin (modification of the exchange type in the one the price of dollars in terms of our coin is increased).

MONETARY DEVALUATION EXPERIENCE IN DEVALUATIONS: While the devaluation in 1938 was associated with the petroleum expropriation, the one in 1948 was considered as part of the worlds adjust after the Second World War. Until July 1948, the exchange type was at $ 4.65 for dollar and from that date on the peso maintained itself floating until in July 1949 it fixed itself at a new price of $ 8.65 for dollar. This price was modified again in April 1954, where it settled at $ 12.50 for dollar without there ever being a point of previous fluctuation. Its adjustment was precipitated by the public expense realized to stop temporarily the economical activity due to the recession that the United States suffered after the Korean War, not leaving out the breakdown on the prices of raw materials that Mexico exported.

DEVALUATION PROCESS IN MEXICO: MONETARY DEVALUATION When the government expends more than it receives as income (such as taxes and others) a deficit (lack of money) is produced in its register, the one that covers making new money without funds; this provokes more circulation of money. While more money is circulating than goods and services, prices rise provoking inflation. These prices sometimes go above the prices of imported goods and services; the government is forced to devaluate the coin to put it in the same level it was before, of course, in dollar's prices.

EXAMPLE: We export products to the United States. Suppose we export a TV; our TV costs $ 2,000.00 and the peso has an exchange type of $ 7.90 for dollar.

TV PESOS EXCHANGE TYPE DOLLARS 2,000.00 $ 7.90 253.16 But in six months our exported product has risen its price by $ 500.00 and the peso still has the same exchange type. As a consequence, our product will be more expensive to other countries they will not buy it.

TV PESOS EXCHANGE TYPE DOLLARS 2,500.00 $ 7.90 316.45 But what happens if we increase our exchange type proportionally to the rise of prices? In order to do that, we will have to know how many percent it increased in the six months. Well, our product increased 25% in six months, so we would have to increase the exchange type by 25%. This way, our TV will cost the same for foreigners in dollar's terms TV PESOS EXCHANGE TYPE DOLLARS 2,500.00 $ 9.87 253.29