Currency devaluation is one of the monetary policy instruments used by policymakers. Currency devaluation is the process of downward adjustment of any country's money value. This is relative to the value of a fixed standard or any other foreign currency. Conventionally, the value of the currency is measured against the dollar price. In a fixed exchange rate system, the value of money can be lowered or increased by the market policymakers based on market pressure.
What is Currency Devaluation?
The word currency means "money," and devaluation means "lowering." Thus, currency devaluation is referred to as the deliberate reduction in the value of the currency. Currency devaluation is different from depreciation as the latter is not a deliberate effort. Depreciation is the reduction in the money value due to poor economic developments. Unlike depreciation, currency devaluation is a monetary policy.
Many economists have understood the disadvantages and advantages of currency devaluation. For most of the general population, currency devaluation has always been a dramatic and traumatic economic policy.
Advantages of Currency Devaluation
Several countries use the monetary policy of currency devaluation for attaining benefits which include:
Most countries use currency devaluation to balance out trade imbalances. The cost of export is reduced, which provides them with a globally competitive market. Reduction in the value of money leads to competitive prices of commodities compared to other makers.
Currency devaluation can result in increased import charges. To balance this increase, wages are increased to enhance the consumers' purchasing power.
Several countries are dependent on many goods and services from other countries. Some countries import more than they export, which results in a trade deficit. With currency devaluation, the export volume increases as the demand for cheaper products in foreign countries increases, balancing or decreasing the trade deficit.
Disadvantages of Currency Devaluation
With currency devaluation, the general population often faces the hit of inflated prices. Consumers are forced to buy from local vendors that may or may not be of the best quality, which again affects the consumers. Only the prominent industrialists benefit from currency devaluation.
Currency devaluation can reduce the trade deficit, but on the flip side, it can also result in an increased burden of debt obtained from foreign countries. By reducing the value of money, the loan price increases compared to the country's home currency.
For any country to implicate the monetary policy of currency devaluation can be both beneficial and detrimental. A country needs to take into account several factors before considering the same. Governments need to manage the process of currency devaluation with good judgment and delicacy.
FAQs on Currency Devaluation
Q.1. What is currency devaluation?
Currency devaluation is the deliberate process of downward adjustment of any country's money value.
Q.2. What are the benefits of currency devaluation?
The benefits of currency devaluation include enhanced export and reduced imports, decreased trade deficit, and increased wages.
Q.3. What are the disadvantages of currency devaluation?
The disadvantages of currency devaluation include increased prices for consumers and increased debt on foreign currency loans.
Q.4. What is the standard currency used for currency devaluation?
Any fixed standard or any other foreign currency, mostly U.S. dollars, is used as the standard currency for currency devaluation.