Devaluation

AAA

DEFINITION of 'Devaluation'

A deliberate downward adjustment to the value of a country's currency, relative to another currency, group of currencies or standard. Devaluation is a monetary policy tool of countries that have a fixed exchange rate or semi-fixed exchange rate. It is often confused with depreciation, and is in contrast to revaluation. 

INVESTOPEDIA EXPLAINS 'Devaluation'

Devaluating a currency is decided by the government issuing the currency, and unlike depreciation, is not the result of non-governmental activities. One reason a country may devaluate its currency is to combat trade imbalances. Devaluation causes a country's exports to become less expensive, making them more competitive on the global market. This in turn means that imports are more expensive, making domestic consumers less likely to purchase them.

While devaluating a currency can seem like an attractive option, it can have negative consequences. By making imports more expensive, it protects domestic industries who may then become less efficient without the pressure of competition. Higher exports relative to imports can also increase aggregate demand, which can lead to inflation.

RELATED TERMS
  1. Current Account Deficit

    A measurement of a country’s trade in which the value of goods ...
  2. Competitive Devaluation

    A series of sudden currency depreciations that nations may resort ...
  3. Balance Of Payments (BOP)

    A record of all transactions made between one particular country ...
  4. Current Account

    The difference between a nation’s savings and its investment. ...
  5. Balance Of Trade - BOT

    The difference between a country's imports and its exports. Balance ...
  6. Bretton Woods Agreement

    A landmark system for monetary and exchange rate management established ...
Related Articles
  1. A Primer On The Forex Market
    Options & Futures

    A Primer On The Forex Market

  2. Interesting Facts About Imports And ...
    Economics

    Interesting Facts About Imports And ...

  3. How Currency Works
    Economics

    How Currency Works

  4. The Gold Standard Revisited
    Budgeting

    The Gold Standard Revisited

Hot Definitions
  1. Hyperinflation

    Extremely rapid or out of control inflation. There is no precise numerical definition to hyperinflation. Hyperinflation is ...
  2. Gross Rate Of Return

    The total rate of return on an investment before the deduction of any fees or expenses. The gross rate of return is quoted ...
  3. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
  4. Leading Indicator

    A measurable economic factor that changes before the economy starts to follow a particular pattern or trend. Leading indicators ...
  5. Wage-Price Spiral

    A macroeconomic theory to explain the cause-and-effect relationship between rising wages and rising prices, or inflation. ...
  6. Accelerated Depreciation

    Any method of depreciation used for accounting or income tax purposes that allows greater deductions in the earlier years ...
Trading Center