DEVALUATION AND DEPRECIATION OF CURRENCY
Definition: Devaluation may be defined as the official reduction of the exchange value of national currency in relation to the currencies of other countries. In other words, it is a reduction in the value of the country’s currency in terms of other currencies of the world. It can also be referred to as a fall in the exchange value of a country’s currency in relation to the currencies of other countries.
Depreciation: Depreciation of currency may be defined as the reduction of the exchange value of a national currency in relation to other currencies as a result of changes in demand and supply in the foreign exchange market.
Effects of devaluation of currency
- Devaluation of currency makes exports cheaper as the prices of goods
produced locally fall.
- Imports become expensive: When a country devalued her currency, her citizens spend more in purchasing of commodities from other countries.
- Reduction in imports: It becomes more expensive to import goods and services into a country that devalued its currency. Fewer goods and services are therefore imported.
- Increase in export: There will be an increase tendency to export goods and services when a country devalued its currency. Devaluation encourages people to export because of its cheapness.
- Balance of payments improvements: Improvement on balance of payments is achieved because of reduction in imports and increase in exports
- Employment opportunities: Devaluation causes an increase in the number of industries and consequently creates more jobs for people.
- Increase in number of industries: As a result of devaluation, export is encouraged and becomes cheaper and this leads to expansion in the number of industries.
CONDITIONS IN WHICH DEVALUATION CAN IMPROVE A COUNTRY’S BALANCE OF
Devaluation will improve the balance of payment position of a country under the following conditions:
- The elasticity of demand for import, must be elastic. Increase in prices of imports, as result of devaluation will reduce the demand for import.
- The country’s exports must have elastic demand in other countries.
- Other nations must not devalue their own countries.
- For devaluation to be effective, there must be no increase in wages and others incomes.
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