Devaluation occurs when a government wishes to increase its balance of trade (exports minus imports) by decreasing the relative value of its currency. The government does this by adjusting the fixed or semi-fixed exchange rate of its currency versus that of another country.
What happens when currency is devalued?
A key effect of devaluation is that it makes the domestic currency cheaper relative to other currencies. ... First, devaluation makes the country's exports relatively less expensive for foreigners. Second, the devaluation makes foreign products relatively more expensive for domestic consumers, thus discouraging imports.
What are the causes of devaluation?
Below, we look at the three top reasons why a country would pursue a policy of devaluation:
- To Boost Exports. On a world market, goods from one country must compete with those from all other countries. ...
- To Shrink Trade Deficits. ...
- To Reduce Sovereign Debt Burdens.
