What is devaluation?

Angelina Ivanova
Angelina Ivanova
October 3, 2011
What is devaluation?

Devaluation is the process of reducing the base price of the national currency (depreciation) relative to the currency of other countries. That is, the devaluation of the ruble is the depreciation of the ruble against other currencies. It is logical to conclude that the devaluation of the hryvnia means a similar depreciation of the hryvnia relative to foreign currency.

Concept of devaluation

If you want to understand what a devaluation is, note that this process should not be confused with inflation, although the concepts are close, because both of them lead to higher prices. Inflation means currency depreciation in a national region, and devaluation is a depreciation relative to international markets. Inflation is extremely difficult to control by the state, it is a spontaneous process. And devaluation is a conscious measure of the Central Bank.

But devaluation is not only open when the country's Central Bank officially announces it in relation to the national currency. In this case, impaired paper money is exchanged or withdrawn from circulation.Also, the devaluation can be hidden when the state reduces the value of its monetary unit in relation to foreign currencies. At the same time, depreciated money is not withdrawn from circulation.

Consequences of devaluation

So, we found out what the devaluation of the ruble. But most of all, people are concerned about the consequences of this phenomenon in their country.

Among them can be identified, both positive and negative points. The first is, for example, an increase in demand for domestically produced goods within the state. Also note a decrease in the rate of spending of foreign exchange reserves of the state, as a result of devaluation. Finally, export stimulation, a positive moment of devaluation! After all, the exporter exchanges the received foreign currency for his depreciated, as a result he has devaluation income.

Of course, it can not be so smooth. We understand that devaluation has many negative consequences:

  • Devaluation - there is a provocation of inflation, its rates are increasing, because, as a consequence of the cheapening of domestic products, producers simply increase prices in the domestic market.
  • Confidence in a currency that depreciates is naturally lost.
  • There is a restriction of imports, as prices rise. Both the population and enterprises that need to purchase foreign technologies, raw materials, etc. suffer.
  • People run to banks to withdraw their cash. Devaluation entails the depreciation of deposits in national currency.
  • In a devalued currency, the size of pensions and patches is reduced, that is, consumer activity is falling.