Profile
Settings
Refer your friends
Sign out
When we talk about the economy of the world, we are also talking about the smaller economies that are trying to make it work on an international level. They are not as powerful or competitive as other major economies, so they make use of tools of devaluation and revaluation of their currency to level the playing field. It allows them to regulate the demand for their goods and currency in the international market. They also use it to control consumption in their domestic market.
What is meant by devaluation of currency?
Tools of depreciation, appreciation, devaluation, and revaluation are often used by the government to control the value of the currency of the nation in a floating rate system. Under this system, the value of the currency is determined on the basis of the relative value of other currencies of the world.
There are a number of reasons why a country would choose to devalue its currency. If we take the case of a country like India, devaluation and revaluation of currency is a tool to fight the rising cost of imports and to earn more from exports. The country will devalue its currency so that the imports become more expensive and the exports help them earn more.
This helps the government curb the demand for imported items and promote the use of locally made goods. In a developing economy, this is the desired condition. However, one should not confuse the term devaluation with depreciation.Depreciation of a currency is when the currency loses its value.
What is revaluation of currency?
The following, depreciation appreciation, devaluation, and revaluation, are merely tools that the government uses to define the value of the currency of a nation. In any economic argument, it is necessary that the currency of the nation be taken into account. It is on this measure that the government uses the tool of devaluation and revaluation of currency.
Revaluation of the currency means that the government is adopting a floating rate system to determine the rate of their currency. Like China used to evaluate its currency on the basis of a gold standard, but later moved on to revaluation of currency and now bases the value of its currency on the basis of the currencies of the world.
There are a number of factors that can affect this change in the value of a currency. Two of the most common ones are the change in the leadership and economic planning of the country and the second is the speculative demand for the currency of the country.
What do these tools do?
Using the tools of devaluation and revaluation, a nation can monitor and control the trend of its expenditure and the direction of its economy. There have been key international incidents that have revolved around currency wars. A currency war is when a country increases or decreases the value of its currency to make it cheaper or dearer in relation to another currency.
This will often prompt a response from another economic giant of the world who would strive to shift the status quo back in their favor. This series of measures and countermeasures will make the global economy go for a ride. This is why there are regulations in place that prohibit unnecessary tampering with the value of currencies of nations.
When used effectively, devaluation and revaluation of a currency can help maintain economic competitiveness in the market. As we had discussed before, a currency that is cheaper in comparison to others will make for more exports and fewer imports. But a currency that is dearer in comparison to other currencies will make the economy more competitive and the currency more sought after.
Who needs these fiscal tools?
Any developing economy will have the need for the tools of devaluation and revaluation of its currency. Regulating the demand and supply is not only a function of the national market; it also needs to regulate the import and export of goods of the nation to maintain an effective balance of payments.
With the use of devaluation and revaluation tools, any economy is capable of leveraging its natural advantages to its favor and promoting its naturally sustainable industries. There is an ever-present demand for the dominant currency of the market. In such a situation, it can be quite difficult for emerging markets to maintain their competitiveness. Thus these tools provide them with the much-needed flexibility to perform in these open markets.
Conclusion
As we got to know, devaluation and revaluation are tools used by major and minor economies to make their currency more competitive and to regulate the trade of their nation. These tools need to be effectively utilized to derive the maximum benefit. As a student of economics or as someone looking to grasp an understanding of global markets, it is important that you know the distinction between them. They use different tools to achieve their objectives, and they serve different goals.
