The net effect of a devaluation on economic growth depends on the mix of capital and labor utilized in the nation's export industries.

Question

Quizplus · Accepted Answer

The mix of capital and labor used in a nation's export industries determines how much the devaluation of its currency affects economic growth. If the export industry uses more labor than capital, a devaluation may enhance growth because the cheaper currency makes labor-intensive products less expensive, causing an increase in demand and leading to a rise in production and employment. However, if the industry uses more capital than labor, devaluation may not encourage growth because it will increase the cost of imported capital goods and might induce inflation that could nullify employment gains.

The Net Effect of a Devaluation on Economic Growth Depends