I am a layman in economics. I am curious about the current devaluation of Australian Dollar in comparison with the US Dollar. Could someone please explain, in simplest words possible:
- What causes currency devaluation? Is it a variety of factors or are there some common factors in all currency devaluations?
- What does this devaluation mean for people living in Australia, people living in US, and people living in other countries, say China? I understand that one of the consequences for Australians is that their exports become cheaper, so foreign countries have more incentive to buy Australia products. For Australians, this could potentially mean more incentive to produce/work/innovate, and to decrease their imports. In other (naive) words, tighten their belts, rely more on themselves and less on the external world. This, logically, seems like a positive sign and should have good consequences. Does this interpretation have any element of truth in it? And is there another, completely opposite, possible outcome of this devaluation?
- What are good (smart) ways for the Australian government and policy makers to respond to this?
- How does devaluation translate in "standard of living". I was looking at the historical exchange rate of AUD and USD here since 2000. Interestingly, in March 2001, the AUD was almost half of USD, and in July 2011, it was more than 1 USD! Surely, it does not mean that the standard of living in Australia in March 2001 was twice as bad as it was in July 2011 (in comparison with US), does it?
I understand that forex rates involve an interconnection of many factors. But, I want to be educated about how much we know about it, and how much of what we know is actually useful for us.