What is currency devaluation?

17.03.2013

The method of evaluating the value of a country’s currency is when it is compared against the value of other countries’ currency. When it is decided to decrease the value of the monetary units of a company, this is called the devaluation of currency. So this causes the stronger currencies to buy more of the devalued currencies.

It is a common thinking that money is just utilized to buy the things. Most of us do not pay attention to a fact that money can be purchased too. Different types of currencies are found in this world and each currency has its own distinct value from the other when it is being compared. Here we can take an example like 1 US dollar may balance the 7 South African rands. So if a person decides to take 1 USD to South Africa then he would get 7 rands in exchange. And if South Africa takes a decision of currency devaluation then perhaps a person can get more or perhaps 10 rands in exchange because the currency would become cheaper.

On the other hand, currency devaluation can be explained in such a way that the devalued currency will be capable to buy limited amount of expensive currencies. For example if a person wants to exchange the South African rands for US dollar after the currency is devalued then he would not even be able to get a full dollar. He may receive some cents only when he would try to exchange.

It is necessary to distinguish between the depreciation and devaluation. When a currency gets depreciated it drops its value too. The basic difference is that the decision of devaluation is taken by the government and the value is decreased intentionally whereas depreciation is a separate case.

Devaluation of currency may take place too due to the inappropriate reserves of foreign currency. It mostly happens when a country purchases its extra currency with the help of stronger foreign currencies. When the supply gets short of such stronger currencies and a country does not like to spend its currency reserves, the deadlock happens. It is often considered that devaluation of currency is a key to recover its currency by utilizing low foreign currency.

Devaluation of currency is a phenomenon that paves way for so many effects. It has deep and ever lasting impact on trade and it is a quite serious and attention seeking aspect. It is a trend that when the currency of a country devalues then the commodities and goods of that particular country becomes less expensive for those countries that have strong currencies. This point can generate positive things if the purpose behind this devaluation is to produce revenue.

Negative effects of devaluation of currency on trade can also be seen too. If you weaken your currency it means that the products of those countries that are having strong currency are becoming more expensive.  So, the countries with the cheap currency have to control and restrict its imports to control this haphazard situation.

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