Devaluation

What is Devaluation?

Devaluation is the reduction of a currency´s value in relation to other currencies. It is a deliberate downward adjustment of the value of a country's currency relative to another currency, group of currencies or standard.

Devaluation tends to reduce domestic demand for imports in a country by rising prices in terms of the devalued currency and to raise foreign demand for the country´s exports by reducing their prices in terms of foreign currencies. Devaluation can therefore help to correct a balance of payments deficit and sometimes provide a short-term Basis for economic adjustment of a national Economy.

Devaluation Instances

For example, in Britain in September 1992 raising interest rates in the situation of stagnation in the economy were the reason for the devaluation of the pound. On September 16 the pound lost 2.7% percent against the Mark and by the evening was traded in New York at 2.703.

Another example, China was accused of practicing a quiet currency devaluation ahead of the U.S. presidential election results in November 2016. Both candidates, Donald Trump and Hillary Clinton, had spoken negatively of China. Some accused China of secretly devaluing its currency so it could revalue the currency after the election and appear to be cooperating with the United States.

Advantages of Devaluation

• It may boost domestic demand. During devaluation exports become cheaper, and more competitive ti foreign buyers. Therefore, this could lead to job creation in the export sector.

• Higher exports and aggregate demand (AD) can lead to higher rates of Economic Growth.

• A higher level of exports should lead to an improvement in the current account deficit. This is important if the country has a large current account deficit due to a lack of competitiveness.