Devaluation

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Devaluation

Summary of Devaluation

The official reduction of the value of a nation’s money in relation to a standard (usually gold), special drawing rights, or the U.S. dollar. Inasmuch as all currencies are ultimately valued in terms of some standard, devaluation results in the conscious increase of the number of units of the affected currency required to equal a given unit of the standard. Until the demise of the Bretton Woods system of fixed exchange rates in 1971, most nations effectively denominated their currencies in terms of the U.S. dollar, which was itself tied to gold. More in the 1980s, efforts have been made to value individual national currencies to special drawing rights (read this and related legal terms for further details) as a neutral standard.

Under the articles of the international monetary FUND (read this and related legal terms for further details), no nation is supposed to officially devalue its currency until the IMF has addressed the problem; as a practical matter, there has been widespread deviation from this principle.

The term devaluation should not be confused with depreciation, which is a decline in the purchasing power of a currency.

See Bretton woods agreement.

(Main Author: William J. Miller)

Devaluation and International Trade Economy

In relation to international trade economy, Christopher Mark (1993) provided the following definition of Devaluation: The lowering of the value of a currency, relative to one or more other currencies, as a result of deliberate government action. Both depreciation and devaluation tend to boost demand for the country’s exports by reducing their prices in .terms of foreign currencies, and to reduce domestic demand for imports by raising their prices in terms of the home currency. Devaluation can provide a short-term boost to an economy encountering balance of payments imbalances –by altering its price competitiveness –but generally has inflationary consequences.

Devaluation in International Trade

Meaning of Devaluation, according to the Dictionary of International Trade (Global Negotiator): The reduction of a currency’s value in relation to other currencies. The exchange values of freely traded currencies are determined by market action. However, governments that interfere with market action can manipulate the value of their currency by fiat. Devaluation tends to reduce domestic demand for imports in a country by rising prices in terms of the devalued currency and to raise foreign demand for the country’s exports by reducing their prices in terms of foreign currencies. Devaluation can therefore help to correct a balance of payments deficit and sometimes provide a short-term basis for economic adjustment of a national economy.

Concept of Devaluation

An introductory definition of Devaluation is provided here: a government deliberately decides to lower the value of its currency relative to other currencies

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  • Foregin Policy
  • Foreign Affairs

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See Also

  • Public Finance
  • Public Policy
  • Tax Law
  • Financial Regulation

Hierarchical Display of Devaluation

Finance > Monetary economics > Monetary policy > Currency adjustment

Devaluation

Concept of Devaluation

See the dictionary definition of Devaluation.

Characteristics of Devaluation

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Translation of Devaluation

Thesaurus of Devaluation

Finance > Monetary economics > Monetary policy > Currency adjustment > Devaluation

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