What is devaluation and how does it affect my finances? (2024)

FAQs

What is devaluation and how does it affect my finances? ›

Devaluation occurs when a country creates a downward adjustment of its currency value to balance trade. Devaluing a currency reduces the cost of a country's exports and makes imports less attractive. As exports increase and imports decrease, there is typically a better balance of payments as the trade deficit shrinks.

Devaluation can result in an increase in the prices of products and services over time. The increase in the price of imports causes consumers to purchase their goods from domestic industries.

For example, if a country has a $100 debt and a debt to GDP ratio of 120 percent, a $1 devaluation will reduce the debt to GDP ratio to 106 percent. A country may choose to devalue its currency if it has become expensive to acquire if it borrows a lot of money in another country's currency.

Devaluing the home currency can help correct the balance of payments and reduce these deficits. There is a potential downside to this rationale, however. Devaluation also increases the debt burden of foreign-denominated loans when priced in the home currency.

Devaluation is a decision that makes a currency lose value. Let's look at the most common types of devaluation and what makes governments implement them. External devaluation. When a country's production costs are high, its goods and services become more expensive abroad than its competitors' and lose competitiveness.

Redistribution of income

There may be a long lag of wages behind prices, and profits might therefore gain at the expense of wages as a result of the devaluation. Rising prices will transfer income from fixed money income groups to the rest of the economy.

Devaluation occurs when a country creates a downward adjustment of its currency value to balance trade. Devaluing a currency reduces the cost of a country's exports and makes imports less attractive. As exports increase and imports decrease, there is typically a better balance of payments as the trade deficit shrinks.

In macroeconomics and modern monetary policy, a devaluation is an official lowering of the value of a country's currency within a fixed exchange-rate system, in which a monetary authority formally sets a lower exchange rate of the national currency in relation to a foreign reference currency or currency basket.

What Is Devaluation? In psychiatry and psychology, devaluation is a defense mechanism that is just the opposite of idealization. 1 It's used when a person characterizes themselves, an object, or another person as completely flawed, worthless, or as having exaggerated negative qualities.

During devaluation, flaws, weaknesses, and negative traits take center stage, and positive qualities are completely ignored. These exclusively negative feelings lead to anger, contempt, and dismissiveness.

What are the cons of devaluation? ›

Cons of currency devaluation

It can cause foreign imports to appear more expensive on domestic markets, and decrease purchasing power in foreign markets. This can encourage domestic consumption but that is not always possible if some goods simply are not available domestically.

Hence, by definition, devaluation is likely to cause inflation. Inflation means a rise in the price of goods and services in the economy. If all the goods and services in the economy become more expensive and the wages do not rise, the workers are at loss. The nominal wages of the workers are stagnant.

Meaning of devaluation

The apex monetary authority of the country sets a lower exchange rate for the national currency in relation to a foreign reference currency or currency basket in case of devaluation. Historically, devaluation has been used as a tool to control the balance of payment deficits.

Summary. Currency value is determined by aggregate supply and demand. Supply and demand are influenced by a number of factors, including interest rates, inflation, capital flow, and money supply. The most common method to value currency is through exchange rates.

Inflation refers to an increase in consumer prices due to economic growth and supply disruption. Devaluation refers to the decline in the value of the currency relative to its foreign counterpart. Deflation is the opposite of inflation.

Social devaluation is a process in which people are excluded, devalued, and discriminated against due to their social group, such as their gender, race, ethnicity, culture, religion, or class. It can lead to a decrease in self-esteem, an increase in stress and anxiety, and a decrease in overall quality of life.

The impact of devaluation can be significant. It often leads to intense conflict, emotional distress, and relationship instability. Those on the receiving end of devaluation may feel confused, hurt, and frustrated, unsure of why they're being treated in such a way.

Feeling challenged, threatened, or disappointed can quickly cause them to devalue the people they formerly idealized. Rather than cope with the stress of ambivalence, devaluing functions to minimize the anxiety caused by ambiguity.