Devaluation

Devaluation is the deliberate downward adjustment of the value of a country's money relative to another currency, group of currencies, or currency standard. Countries that have a fixed exchange rate or semi-fixed exchange rate use this monetary policy tool. It is often confused with depreciation and is the opposite of revaluation, which refers to the readjustment of a currency's exchange rate. The government of a country may decide to devalue its currency. Unlike depreciation, it is not the result of nongovernmental activities. A country may devalue its currency to combat a trade imbalance. Devaluation reduces the cost of a country's exports, rendering them more competitive in the global market and increasing the cost of imports. If imports are more expensive, domestic consumers are less likely to purchase them, further strengthening domestic businesses. Because exports increase and imports decrease, there is typically a better balance of payments because the trade deficit shrinks. In short, a country that devalues its currency can reduce its deficit because there is greater demand for cheaper exports. [Investopedia]

Devaluation will not be effective if the balance-of-payments disequilibrium results from basic structural flaws in a country’s economy. In contrast to devaluation, revaluation involves an increase in the exchange value of a country’s monetary unit in terms of gold, silver, or foreign monetary units. It may be undertaken when a country’s currency is undervalued, causing persistent balance-of-payments surpluses [Encyclopedia Britannica].

Sources:

Majaski, C. (2021) Devaluation: Definition, How It Works, and Examples. Investopedia. Retrieved from: https://www.investopedia.com/terms/d/devaluation.asp

Devaluation. Britannica. The Editors of Encyclopaedia. Encyclopaedia Britannica, 5 Aug. 2019. Retrieved from: https://www.britannica.com/topic/devaluation