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 FAQS
  1. How do changes in national interest rates affect a currency's value and exchange ...

    All other factors being equal, higher interest rates in a country increase the value of that country's currency relative ... Read Full Answer >>
  2. How does inflation affect the exchange rate between two nations?

    The rate of inflation in a country can have a major impact on the value of its currency and the rates of foreign exchange ... Read Full Answer >>
  3. Do speculators have a destabilizing effect on the financial system?

    A speculator is anyone who trades derivatives, commodities, bonds, equities or currencies with higher-than-average risk in ... Read Full Answer >>
  4. How is free enterprise affected by monetary policy?

    Monetary policy is concerned with the quality, quantity and function of money instruments in an economy. Perhaps the best ... Read Full Answer >>
  5. How are earmarks and pork barrel spending related?

    Both earmarks and pork barrel spending involve spending money on certain projects or specific events. Projects paid for by ... Read Full Answer >>
  6. What does it mean when a country has little activity in its capital account?

    Since a country's capital account represents money flow into the country through foreign investment, having only a small ... Read Full Answer >>
Related Articles
  1. Options & Futures

    A Primer On The Forex Market

    Moving from equities to currencies requires you to adjust how you interpret quotes, margin, spreads and rollovers.
  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. Budgeting

    The Gold Standard Revisited

    Think the value of gold is unshakable? Read this chronicle of its rise and fall.
  5. Forex Education

    Dollarization Explained

    Find out how fledgling economies can find some stability in their currency and attract foreign investment.
  6. Forex Education

    The U.S. Dollar's Unofficial Status as World Currency

    Discover how and why the U.S. dollar emerged as official currency in many foreign countries.
  7. Forex Education

    The Plaza Accord: The World Intervenes In Currency Markets

    In 1985, the G-5 nations signed an agreement to devalue the United States currency and correct the GDP. To an extent, it worked. But there were casualties.
  8. Options & Futures

    Trading The Gold-Silver Ratio

    This method may seem arcane, but many well-established strategies rely on it.
  9. Personal Finance

    Step-by-Step: How To Replace Or Renew Your Green Card

    It's not fast and it's not cheap. But it is pretty easy. Here's how.
  10. Economics

    Current Countries Under A Western Embargo

    We look at which countries the United States and European Union have imposed an imposed embargoes on and why.

You May Also Like

Hot Definitions
  1. Fisher Effect

    An economic theory proposed by economist Irving Fisher that describes the relationship between inflation and both real and ...
  2. Fiduciary

    1. A person legally appointed and authorized to hold assets in trust for another person. The fiduciary manages the assets ...
  3. Expected Return

    The amount one would anticipate receiving on an investment that has various known or expected rates of return. For example, ...
  4. Carrying Value

    An accounting measure of value, where the value of an asset or a company is based on the figures in the company's balance ...
  5. Capital Account

    A national account that shows the net change in asset ownership for a nation. The capital account is the net result of public ...
  6. Brand Equity

    The value premium that a company realizes from a product with a recognizable name as compared to its generic equivalent. ...
Trading Center