A. Definition of terms

Devaluation is a reduction in the value of a currency with respect to those goods, services or other monetary units with which that currency can be exchanged.

Currency devaluation takes place when one country's currency is reduced in value in comparison to other currencies. After currency devaluation, more of the devalued currency is required in order to purchase the same amount of other currencies. A fictional example: If last year, forty Philippine pesos purchased one U.S dollar for a ratio of 40:1 then this year, fifty Philippine pesos is needed to purchase one U.S. Dollar (50:1), the Philippine Peso is said to have undergone a currency devaluation. This would mean that the Philippine peso has devalued 10 pesos or 20% against the dollar the past year.

In common modern usage, it specifically implies an official lowering of the value of a country's currency within a fixed exchange rate system, by which the monetary authority formally sets a new fixed rate with respect to a foreign reference currency. In contrast, depreciation is used for the unofficial decrease in the exchange rate in a floating exchange rate system. The opposite of devaluation is called revaluation.

Currency appreciates (increases value) or depreciates (loses value) based on the system in place. There are two systems: fixed rate and floating rate. Under a fixed system, only the government can change the value of the currency. The Philippines, as well as majority of industrialized countries, rely on a floating system. With floating exchange rates, currencies lose or gain value based on the demand in different worldwide markets.

If a country devalues its currency, other countries are able to import products from that nation at a cheaper price. However, this increases the cost of importing goods and increases the demand for products made at home. In turn, this stimulates inflation. Inflation is the general rise in prices throughout a country's economy, because the demand for goods or services exceeds the supply. People exploit this, charging higher prices with the knowledge that purchasers will have to pay, whether they like it or not. This is detrimental to consumers, especially if their incomes do not increase accordingly to compensate. Consequently, there is reduction in citizens' standard of living as their purchasing power is reduced both when they buy imports and when they travel abroad

Psychological Effects While a strong currency is good for a country's image, devalued currency can have the opposite

effect. As a nation's currency loses value, its economy seems weaker, which affects its credit. When this happens, investors may be apprehensive to put their money into that economy. The end result is that the country with devalued currency will find it difficult to obtain foreign investors.

Chain Reactions Devaluing currency can set off a domino effect of depreciation. Foreign traders may feel that

their export industries are threatened. To prevent this from happening, other countries may devalue their currencies as well. The Federal Reserve Bank of New York refers to this as a

"beggar thy neighbor" policy. The end result is general economic instability. The International Monetary Fund was established to help moderate trade between countries and prevent successive devaluations.

Read more: What Are the Dangers of Currency Devaluation? | eHow.com http://www.ehow.com/info_8470217_dangers-currency-devaluation.html#ixzz1XSPpt32i

To Correct the Balance of Payment:When the balance of payment of any country is unfavourable the devaluation policy is adopted when the currency is devalued, the value of imports increase but the value of exports decreases. So when value of exports will be greater then the value of imports, we will say that balance of payment is favourable

Floating

B. The Positive and Negative Effects of a Strong Philippine PesoC. What are the advantages and disadvantages of Peso depreciationD. Position Paper