Devaluation of Currency: Meaning, Reasons, Devaluation vs Depreciation
Devaluation of Currency: The reduction of a currency´s value in relation to other currencies or a decrease in the exchange value of a currency against gold or other currencies, brough. After Providing How the value of rupee is determined?, Here we are providing everything you can to know about Devaluation of Currency like – Meaning of Devaluation of Currency, Difference between Devaluation vs Depreciation, Reasons for devaluation etc. Now you can scroll down below and check more details for “Devaluation of Currency, Meaning, Reasons”
Devaluation of Currency
Devaluation of currency :
Devaluation of a currency means that the currency issuing authority intentionally makes the adjustment to force the value of their currency down in relation to the foreign exchange.
For example if the Indian government and RBI together set the value of rupee down that 70 rupees = 1 us $ then this has to be said as devaluation.
Devaluation may be done to make the trade imbalances balanced and to curb the serious economic problems.
Devaluation vs Depreciation :
Devaluation is often confused of depreciation while both are distinctly used in different situations. Devaluation happens in a fixed exchange rate whereas the other one happens in floating exchange rate. There are many circumstances under which a government may decide to devalue their currency which the china government is doing currently. It would help to reduce the trade deficit of a nation by making the Exports cheaper and Imports costlier.
Depreciation in the value of a country’s currency is a situation where the general economic factors force the value of the down in relation to foreign exchange. For example the imbalance between demand and supply may cause the value of rupee down when compared US$. This occurs in floating exchange rate system. It has no actions from the government or RBI’s side forcing the value down.
Must Read –
Reasons for devaluation :
If we go into finding the reasons behind devaluation of a country’s currency , following can be said as the main reasons for this scenario.
(1) To discourage the Imports :
Discouraging the Imports is an effective tool to curb inflation to some extent. As the value of currency is highly affected by the amount of payments made for importing goods and services from the foreign, reducing the Imports is a selective measure to make the trade deficit balanced. When a country devaluates its currency then it has to pay more for the Imports than earlier.
(2) To encourage exports :
Devaluation of the currency results in making the products of that country cheaper globally thus it enables to increase the exports. This will set down the trade imbalances. If a country devaluates its currency it means it has to pay more to the international exchange units say $. Along side if the people in other countries want to import something from the nation which devaluates its currency then they don’t need pay more as earlier.So it helps to encourage the exports which in turn strengthening the economic position in the long-run.