Competitive Devaluation

AAA

DEFINITION of 'Competitive Devaluation'

A series of sudden currency depreciations that nations may resort to in tit-for-tat moves to gain an edge in international export markets. Competitive devaluation refers to a scenario in which an abrupt national currency devaluation by one nation is matched by a currency devaluation of another, especially if they both have managed exchange-rate regimes rather than floating exchange rates determined by market forces. Competitive devaluation is considered a “beggar-thy-neighbor” type of economic policy, since it amounts to a nation trying to gain an economic advantage without consideration for the ill-effects it may have on other countries.

INVESTOPEDIA EXPLAINS 'Competitive Devaluation'

The act of currency devaluation or depreciation improves a nation’s export competitiveness because it lowers the cost of goods exported from that nation for overseas buyers. For example, when the exchange rate is EUR 1 = $1.40, assume a European exporter sells a product in the U.S. at $10, which is equivalent to about EUR 7.14. If the EUR subsequently falls to 1.25, the exporter can slash the price of the product to $9 and still receive the equivalent of EUR 7.20 because each dollar now fetches more euros.

Currency devaluation also has a positive impact on a nation’s trade deficit because it makes imports more expensive. This forces domestic consumers to look for local alternatives to imported products, which provides a boost to domestic industry. This combination of export-led growth and increased domestic demand usually contributes to higher employment and faster economic growth.

The negative aspect of currency devaluation is that it may lower productivity, since imports of capital equipment and machinery may become too expensive. As well, devaluation significantly reduces the overseas purchasing power of a nation’s citizens.

Competitive devaluation is viewed as being harmful or deleterious to the global economy, because it may set off a round of currency wars that may have unforeseen adverse consequences, such as increased protectionism and trade barriers. At the very least, competitive devaluation may lead to greater currency volatility and higher hedging costs for importers and exporters, which may impede a higher level of international trade.

RELATED TERMS
  1. Devaluation

    A deliberate downward adjustment to the value of a country's ...
  2. Import And Export Prices

    Two indexes that monitor the prices of imports and exports in ...
  3. International Currency Exchange ...

    The rate at which two currencies in the market can be exchanged. ...
  4. International Currency Markets

    The market in which participants from around the world are able ...
  5. Currency Basket

    A selected group of currencies in which the weighted average ...
  6. Protectionism

    Government actions and policies that restrict or restrain international ...
Related Articles
  1. Economics

    Sanctions Between Countries Pack a Bigger Punch Than You Might Think

    In response to Russia's annexation of Crimea, in March 2014 the West slapped sanctions on dozens of Russian hotshots. So what, you ask? Well, sancitons can pack a bigger punch than you might ...
  2. Economics

    Interesting Facts About Imports And Exports

    Imports and exports exert a profound influence on the consumer and the economy. Learn what affects these figures, and in turn how these figures affect the economy.
  3. Economics

    How Currency Works

    Currency offers key advantages over economies based on direct trade. It provides sellers with a broader market for their goods and services, and provides a durable asset with which people can ...
  4. Forex Fundamentals

    The Effects Of Currency Fluctuations On The Economy

    Currency fluctuations are a natural outcome of the floating exchange rate system that is the norm for most major economies. The exchange rate of one currency versus the other is influenced by ...
  5. Personal Finance

    What Is International Trade?

    Everyone's talking about globalization, so we explain what is it and why some oppose it.
  6. Economics

    The Basics Of Tariffs And Trade Barriers

    Everything you need to know - from the different types of tariffs to their effects on the local economy.
  7. Forex Education

    The Forex Market: Who Trades Currency And Why

    The forex market has a lot of unique attributes that may come as a surprise for new traders.
  8. Forex Education

    Drastic Currency Changes: What's The Cause?

    Currency fluctuations often defy logic. Learn the trends and factors that result in these movements.
  9. Forex Education

    The History Of Money: Currency Wars

    Find out how conflicts have changed the role money plays in our lives.
  10. Bonds & Fixed Income

    6 Factors That Influence Exchange Rates

    Find out how a currency's relative value reflects a country's economic health and impacts your investment returns.

You May Also Like

Hot Definitions
  1. DuPont Analysis

    A method of performance measurement that was started by the DuPont Corporation in the 1920s. With this method, assets are ...
  2. Asset Class

    A group of securities that exhibit similar characteristics, behave similarly in the marketplace, and are subject to the same ...
  3. Fiat Money

    Currency that a government has declared to be legal tender, but is not backed by a physical commodity. The value of fiat ...
  4. Interest Rate Risk

    The risk that an investment's value will change due to a change in the absolute level of interest rates, in the spread between ...
  5. Income Effect

    In the context of economic theory, the income effect is the change in an individual's or economy's income and how that change ...
  6. Price-To-Sales Ratio - PSR

    A valuation ratio that compares a company’s stock price to its revenues. The price-to-sales ratio is an indicator of the ...
Trading Center