If there is inflation in a country, what happens to its currency?
1 Answer
If inflation is there in a country, either the markets will devalue its currency or at some point the country will have to devalue its currency to keep its products competitive.
Explanation:
This is more a question related to Economics than Statistics. But as the subject has not yet been launched in Socratic, I will try to answer this.
When the price level of a trading partner, say country B increases i.e. inflation occurs there, while our price level has remained unchanged, the issue is, Can B price their goods higher"?
May be in case of of a particular product, where B has a monopoly i.e. B is the only seller or a major seller, may be it it can. But this is generally not so and is very limited, as (i) there may be other suppliers / substitutes of the product and (ii) the elasticity of demand comes into picture and there may be a limit to which it can increase the price.
What generally happens in such a case for country B is that if its inflation is higher, it has to devalue its currency at some point of time (either directly or if value of its currency is market determined, markets will make it relatively cheaper) to keep its products internationally at a competitive prices and hence imports of other countries in relation to country B may not be affected.
