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.

BREAKING DOWN '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

    Devaluation is a deliberate downward adjustment to the value ...
  2. Currency Depreciation

    Currency depreciation is a decrease in the level of a currency ...
  3. Key Currency

    A key currency used is money issued by stable, developed country ...
  4. Trade Deficit

    A trade deficit occurs a country's imports exceeds its exports. ...
  5. National Currency

    A national currency is a legal tender issued by a central bank ...
  6. Trade Surplus

    A trade surplus is an economic measure of a positive balance ...
Related Articles
  1. Trading

    3 Reasons Why Countries Devalue Their Currency

    Ever since world currencies abandoned the gold standard, many currency devaluation events have sent disruptive ripples across the globe.
  2. Investing

    What Is A Currency War And How Does It Work?

    We look at what a currency war is, what factors may lead to it, the impacts of such a strategy, and whether there is a currency war currently.
  3. Trading

    The Hazards Of Currency Movements

    Devaluation and revaluation are official changes in the value of a nation’s currency in relation to other currencies. The terms are generally used to refer to officially sanctioned changes in ...
  4. Investing

    Will South Korea Devalue the Won?

    Learn why the largest countries in Asia are devaluing their currencies. Discover how South Korea may respond and what this means for Asian economies.
  5. Trading

    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.
  6. Trading

    Main Factors that Influence Exchange Rates

    The exchange rate is one of the most important determinants of a country's relative level of economic health and can impact your returns.
  7. Trading

    3 Foreign Currencies to Buy at a Discount to the U.S. Dollar

    Thanks to a relatively strong U.S. economy and the prospect of rising interest rates, the greenback has the most buying power overseas in more than a decade, as measured by the dollar spot index. ...
  8. Insights

    The Pros & Cons of a Trade Deficit

    Is a trade deficit, also known as a current account deficit, beneficial or detrimental to a country's economy?
  9. Trading

    Drastic Currency Changes: What's The Cause?

    Currency fluctuations often defy logic. Learn the trends and factors that result in these movements.
  10. Investing

    China, Not Brexit, Is the Biggest Problem for the World

    Many experts consider China's currency and credit situation as the biggest global economic risk, not Britain's decision to leave the EU.
RELATED FAQS
  1. How do national interest rates affect a currency's value and exchange rate?

    Generally, higher interest rates increase the value of a country's currency and lower interest rates tend to be unattractive ... Read Answer >>
  2. Why is the U.S. dollar shown on the top of some currency pairs and on the bottom ...

    All currencies are traded in pairs. The first currency in the pair is called the base currency while the second is called ... Read Answer >>
  3. Why isn't the EUR/USD currency pair quoted as USD/EUR?

    In a currency pair, the first currency is called the base currency and the second is the quote currency, a longtime convention ... Read Answer >>
  4. What is the difference between a current account deficit and a trade deficit?

    Learn the meanings of the macroeconomic terms "current account deficit" and "trade deficit," and understand the differences ... Read Answer >>
Hot Definitions
  1. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  2. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  3. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  4. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  5. Current Assets

    Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...
  6. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
Trading Center