Devaluation is the deliberate downward adjustment of the value of a country's money relative to another currency or standard. It is a monetary policy tool used by countries with a fixed exchange rate or semi-fixed exchange rate.
Key Takeaways
Devaluation is the deliberate downward adjustment of a country's currency value.
The government issuing the currency can decide to devalueits currency.
Devaluing a currency reduces the cost of a country's exports and can help shrink trade deficits.
By devaluing its currency, a country makes its money cheaper and boosts exports, rendering them more competitive in the global market. Conversely, foreign products become more expensive, so the demand for imports falls. Governments use devaluation to combat a trade imbalance and have exports exceed imports.
As exports increase and imports decrease, there is typically a better balance of payments as the trade deficit shrinks. A country that devalues its currency can reduce its deficit because of the greater demand for its less expensive exports.
Devaluation is the opposite of revaluation, which refers to the readjustment of a currency's exchange rate.
Consequences of Devaluation
While devaluinga currency may be an option, it can have negative consequences.
Manufacturers may have less incentive to cut costs because exports are cheaper, increasing the cost of products and services over time.
Currency Wars
There has been historical conflict between countries such as China and the United States over the valuation of their currencies. A monetary policy that stresses devaluation allows a country to remain competitive in the global trading marketplace. Devaluation also encourages investment, drawing in foreign investors to cheaper assets.
In August 2023, Fitch Ratings downgraded the United States' Long-Term Foreign-Currency Issuer Default Rating (IDR) to "AA+" from "AAA."The downgrade reflects the expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance relative to "AA" and "AAA" peers over the last two decades resulting in repeated debt limit standoffs and untimely resolutions.
The Omnibus Trade and Competitiveness Act of 1988 requires the U.S. Secretary of the Treasury to analyze the exchange rate policies of other countries and determine if they are manipulating the exchange rate between their currency and the United States dollar. In 2019, Secretary Mnuchin found that China devalued its currency to gain an unfair competitive advantage in international trade.
However, in 2023, following several years of trade woes caused by the COVID-19 pandemic, China’s central bank hopes to keep theChinese yuanfrom weakening too quickly against the U.S. dollar as imports are becoming more expensive relative to its exports.The offshore yuan traded around 7.15 per dollar in May 2023, and Chinese exports fell more than expected, reflecting the country’s slow recovery path.
How Do Tariffs Combat Devaluation?
When imported goods become less expensive and attractive to consumers, a country may impose tariffs to increase the cost of those goods to reclaim demand for domestic products.
How Does Devaluation Affect International Trade?
Devaluation causes a shift in international trade, changing the balance of trade in favor of the devaluing country. Revising how much one currency is worth relative to another means the relative cost of goods from each country also changes.
What Is the Difference Between Devaluation and Depreciation?
Devaluation occurs when a government changes the fixed exchange rate of its currency. Most currencies traded on foreign exchange markets are not pegged to another currency, and the market determines their value with floating exchange rates. If the demand for one currency changes relative to another due to market forces and loses value, it is called depreciation.
The Bottom Line
Devaluation occurs when a country creates a downward adjustment of its currency value to balance trade. Devaluing a currency reduces the cost of a country's exports and makes imports less attractive. As exports increase and imports decrease, there is typically a better balance of payments as the trade deficit shrinks.
Devaluation is the deliberate downward adjustment of a country's currency value. The government issuing the currency can decide to devalue its currency. Devaluing a currency reduces the cost of a country's exports and can help shrink trade deficits.
In macroeconomics and modern monetary policy, a devaluation is an official lowering of the value of a country's currency within a fixed exchange-rate system, in which a monetary authority formally sets a lower exchange rate of the national currency in relation to a foreign reference currency or currency basket.
Right now, you can exchange one US dollar for one Panamanian balboa. But Panama could decide to devalue its currency by changing that fixed exchange rate. If the Panamanian government suddenly said that one US dollar was worth two balboa, that would be a 50 percent devaluation.
There are a few reasons why a country may want to devalue its currency. Devaluing a currency is usually an economic policy, whereby devaluation makes a currency weaker compared with other currencies, which would boost exports, close the gap on trade deficits, and shrink the cost of interest payments on government debt.
1. : an official reduction in the exchange value of a currency by a lowering of its gold equivalency or its value relative to another currency. 2. : a lessening especially of status or stature : decline.
The narcissist will start dropping subtle hints that you've done something wrong, that you've forgotten something important, or that you've hurt their feelings. You'll start to feel insecure. Some indicators include: Passive-aggressiveness. Backhanded compliments.
Devaluation involves a shift in the person's perception of others, where they view someone they previously idealized or held in high regard as unworthy, flawed, or worthless.
If the U.S. dollar collapses: The cost of imports will become more expensive. The government wouldn't be able to borrow at current rates, resulting in a deficit that would need to be paid by increasing taxes or printing money.
Devaluation can result in an increase in the prices of products and services over time. The increase in the price of imports causes consumers to purchase their goods from domestic industries. The amount of the price increases, however, is dependent on the competition of supply and aggregate demand.
The impact of devaluation can be significant. It often leads to intense conflict, emotional distress, and relationship instability. Those on the receiving end of devaluation may feel confused, hurt, and frustrated, unsure of why they're being treated in such a way.
By devaluing its currency, a country makes its money cheaper and boosts exports, rendering them more competitive in the global market. Conversely, foreign products become more expensive, so the demand for imports falls. Governments use devaluation to combat a trade imbalance and have exports exceed imports.
Devaluing a currency can allow a country to correct a trade imbalance, increasing exports and decreasing imports. When a country devalues its currency, it makes its money cheaper. This boosts exports and can make the country more competitive in global trade.
What Is Devaluation? In psychiatry and psychology, devaluation is a defense mechanism that is just the opposite of idealization. 1 It's used when a person characterizes themselves, an object, or another person as completely flawed, worthless, or as having exaggerated negative qualities.
When a country decides to devalue their currency to make its goods and services cheaper, it can cause an increase in inflation. Inflation means that as the prices of goods and services rise, the value of a currency declines.
By devaluing its currency, a country makes its money cheaper and boosts exports, rendering them more competitive in the global market. Conversely, foreign products become more expensive, so the demand for imports falls. Governments use devaluation to combat a trade imbalance and have exports exceed imports.
The apex monetary authority of the country sets a lower exchange rate for the national currency in relation to a foreign reference currency or currency basket in case of devaluation. Historically, devaluation has been used as a tool to control the balance of payment deficits.
So the Fed could just print a bunch of money in an attempt to devalue the dollar. This would lower interest rates, which would make buying U.S. bonds a worse deal financially. Presumably, that would get some countries to buy fewer U.S. bonds, thus depreciating the dollar.
Introduction: My name is Gregorio Kreiger, I am a tender, brainy, enthusiastic, combative, agreeable, gentle, gentle person who loves writing and wants to share my knowledge and understanding with you.
We notice you're using an ad blocker
Without advertising income, we can't keep making this site awesome for you.
:max_bytes(150000):strip_icc()/Devaluation-final-6680efadc554432eb1b950c67375aa18.png "Devaluation: What It Is and How It Works (1)")
