A devaluation leads to a decline in the value of any currency making exports more competitive and imports more expensive. Inflation takes place when there is an increase in the general price level. A accounting allowance could cause pumpiing for three or more reasons.
Firstly, there is certainly likely to be an increase in AD. ADVERTISEMENT = C+I+G+X-M, Therefore if export products are less expensive will be more export products sold, imports will fall season. If the economic climate is close to full potential then larger AD will cause inflation.
Plan: Demand Draw inflation
Yet , increased ADVERTISEMENT may not cause inflation this will depend on numerous factors:
a) If the economic system is in economic downturn and there is free capacity people not always be inflation b) IF other aspects of AD are generally not increasing (e. g. customer spending is definitely low) in that case there is not likely to be demand pull inflation. (X-M can be not the most important component of AD) c) Also if export products are cheaper then the impact on AD is determined by the firmness of require. IF demand is inelastic there will be a small increase in Quantity and there could be a fall in the benefit of exports (Marshall Lerner condition declares devaluation simply increases ADVERTISING if PEDx + PEDm > 1) Secondly, if there is a accounting allowance then it will have an increase in the cost of imported merchandise. Imports can be a significant portion of the RPI, therefore there will be price push inflation. However it may be possible that stores may not complete the price improves onto consumers but have reduced profit margins.
Third, if there is a devaluation export products become less competitive with no firms being forced to make much effort, therefore there is less incentive for them to cut costs and for that reason in the long run costs will increase and for that reason inflation increases. However this might not arise if businesses are well manage
The UK devalued its foreign currency quite substantially in 1992 when it still left the ERM however it did not cause inflation. This was because the economy is at a recession and there is a lot of spare ability. This shows there are...