Devaluation: What it is, causes and consequences - GovtVacancy.Net

Devaluation: What it is, causes and consequences

It is known as devaluation a situation in which a currency is worth less than before. This by making a price comparison with other more stable currencies.

Devaluation concept

Devaluation is the decrease in the value of one currency relative to others. In other words, it is the scenario in which a national currency experiences a reduction in its nominal value with respect to other currencies (foreign currencies).

Causes of inflation

• Distrust in the national economy: It happens when the population loses confidence in the country's economic system and in the stability of the legal tender.

• Low demand for currency: This occurs when the local currency is in low demand, causing its value to decline.

• High demand for foreign currency: A situation that occurs when there is a high demand for foreign currency. This generates that the national currency is less requested and therefore experiences a reduction in its value.

• Excessive printing of banknotes: By issuing more money without support in the economy of a country, the circulation of banknotes increases, which results in a constant and general increase in prices (inflation) and with it, a loss of value of the currency.

• Capital flight: Refers to the rapid outflow of money from a country for economic reasons. This situation causes the national wealth to be reduced, affecting the exchange rate, that is, there is a depreciation of the value of the national currency.

It should be noted that the devaluation can be produced by one or several of the previously mentioned causes. That is, there may be combined causes.

Consequences of devaluation

• Loss of purchasing power: When the value of the currency falls, the population loses purchasing power. If before a certain product was purchased with a certain sum of money and eventually more is needed to acquire the same product, then a decrease in purchasing power is experienced.

• Inflation: The chances of an inflationary scenario arising increase.

• Savings decline: As the value of the domestic currency declines, so do savings in that same currency.

• Negative impact on wages: Wages also suffer the negative effects of currency depreciation. Salary perceptions tend to keep pace with the devaluation of the currency, and salary adjustments to deal with this situation do not usually go hand in hand with the constant loss of this monetary value.

• Affects finances: Personal finances and family finances are diminished in this scenario.

Benefits of devaluation

• It promotes tourism since foreign money is worth more and therefore attracts the attention of a greater number of potential tourists.

• It favors those with foreign currency or foreign exchange earnings since their purchasing power increases.

• It promotes exports, since the prices of products in countries with devaluation are lower, stimulating purchases by other countries.

• Remittances have more value, making the beneficiaries take advantage of the money they receive from abroad.

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