Quote:
Originally Posted by seabass
Easy to answer : if you buy a bottle of coca cola at 10,000 dong and next month it cost 11,000 dong the dong has devalued by 10% ( approximately )
The economic theory is a bit difficult to explain but it is called Fisher's Equation. It has to do with a person perception on expectation of future inflation.
What the government is doing is this : the devaluation is to trigger a increase in economic activity. If the VN currency is deem as cheaper, then the demand for VN product will increase. The opposite is true; foreign goods will become more expensive. The move to devalue the dong will have an effect on the real interest as compare to the nominal interest.
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From what I read about Fisher Equation is about inflation and monetary policy. Nothing talking about devaluation of currency. The Vietnam government devalued dong is to spur export. Thus making the dong more competitive and lower against major currencies.
http://en.wikipedia.org/wiki/Fisher_...onetary_policy
So your theory of dong devalued 1% means approximately devalued by 10% do not hold. Also your coca cola example above proved the theory of inflation.