Devaluation is Definition, types, causes and consequences of devaluation

2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:54

Economics is filled with beautiful, but obscure terms - inflation, devaluation, denomination. Nevertheless, understanding the essence of all these concepts is not as difficult as it seems. And for this it is not necessary to have a specialized economic education. In this article, we will introduce the reader to devaluation, its main types and causes. What is behind this term? And how dangerous is devaluation for the national economy?

Devaluation is… Meaning of the word

The word "devaluation" came to Russian from Latin. It is derived from the Latin verb valeo ("to cost", "to have value") and the prefix de-, which means to lower something. The main synonym is "depreciation". The antonym is "revaluation" (we will also talk about this term in our article).

Devaluation is a widely used term in economic theory. However, it can also be found in some other scientific disciplines. For example, in psychology andpedagogy, where it is used as a category of "personality devaluation". In this case, the degradation of the main characteristics of the social nature of a person (primarily spiritual and moral) is implied.

Besides this, the term is also used in literary speech. Often in books and popular science articles you can find the following figurative phrases: "devaluation of the word", "devaluation of the meaning", etc.

What is devaluation (in the economy)?

In the early 2000s, one US dollar had to pay 30 Russian rubles, today - twice as much. Nominally, a thousand rubles and a thousand euros are one and the same. But in reality, there is a deep abyss between them.

So, what is the essence of economic devaluation? The definition of the term is quite simple. This is an official depreciation of the domestic currency against more reliable foreign currencies (most often the dollar or the euro). In simpler terms, this economic phenomenon can be explained as follows: yesterday for 100 rubles you could buy 10 units of a certain product on the world market, and today - only 9 units of the same product.

Besides, devaluation is not only a process, but also a tool for managing the national currency. In this context, the term is used in scientific papers and reports by the IMF (International Monetary Fund).

Currency devaluation almost always leads to a rise in the price of essential goods (in particular, food) and real estate. Devaluation is often followed bytrue companion is inflation, and there is an increase in prices for absolutely all goods and services in the country.

Devaluation and inflation: correlation of concepts

Inflation is also associated with a decrease in purchasing power. But its main difference lies in the fact that it devalues the national currency on the domestic market (that is, in relation to local goods and services), but the devaluation does the same with the domestic currency on the world stage.

Very often it is the devaluation that is primary, provoking inflation. But these two processes can also exist autonomously. Thus, devaluation is possible without inflation if foreign currencies are currently subject to deflation (decrease in the general price level).

Devaluation is always a strong (very tangible), large-scale and prolonged fall of the national currency. Inflation, in turn, is often short-lived and can capture only certain regions of a particular state. Plus, inflation is always a spontaneous and uncontrollable phenomenon, unlike devaluation, which can be caused artificially.

Devaluation and revaluation

Revaluation is a phenomenon diametrically opposed to devaluation. Its definition can be summarized as follows: it is the rise (strengthening) of the domestic currency. What does this mean for ordinary citizens? First of all, for them it is an incentive to purchase foreign currency, which is losing its positions.

The national economy as a whole revaluation promises stability and prosperity. In other words, foreign investors will begin to come to the country and invest their money in local enterprises and projects.

But the revaluation has its own negative side. Thus, its too high rates will absolutely not contribute to the growth of the national economy. After all, imported goods will pour into the domestic market, which will certainly hit domestic producers.

Reasons for devaluation

The depreciation of the national currency can be caused by both macroeconomic and domestic political factors. For example, devaluation is often the result of systematic actions of regulatory authorities in a particular state. In this case, it will be considered artificial.

Let's list the possible objective reasons for the devaluation:

Military actions and conflicts.
International sanctions.
Massive outflow of capital abroad.
Sharp drop in prices for raw materials exported by the state.
Decrease in bank lending in the country.
General economic or political instability.
Turning on the "printing press".
Seasonal factors (for example, a temporary decrease in business and entrepreneurial activity).

Many people ask a natural question: is it possible to somehow protect your funds from devaluation? There are at least two ways to keep your hard earned money:

Savings are best kept in hard, stable currencies.
Money anywayshould not be stored "under the mattress". They need to be invested in something (at least in a bank, so that the deposit interest covers possible fluctuations in the exchange rate).

Devaluation and its consequences

It is easy to guess that with the depreciation of the national currency, those enterprises that buy raw materials for their production cycles abroad suffer the most. This will invariably lead to a significant increase in the cost of their final product.

In general, the following negative consequences of devaluation for the national economy can be distinguished:

Significant rise in inflation.
Declining confidence in the domestic currency among the population.
Total hibernation (slowdown) of all business activity.
Depression in the country's financial sector.
Rising prices for imported goods and, as a result, import substitution.
The risk of bankruptcy of those enterprises that work on foreign raw materials or equipment.
Depreciation of deposits in national currency.
Decrease in purchasing activity of citizens.

However, the devaluation has its positive aspects. But we will talk about them a little later.

Types of devaluation

In economic theory, there are two main types of devaluation:

Official (or open).
Hidden.

With an open devaluation, the country's main financial institution officially announces a depreciation of the national currency. At the same time, all the nuances and all the changesexchange rate is completely open to the public. At the same time, depreciated banknotes are either withdrawn from circulation or exchanged for new ones. Open devaluations tend to happen fairly quickly, within just a few hours.

Hidden devaluation is taking place without any public statements or comments from the authorities. At the same time, depreciated money is not withdrawn from circulation. Such devaluation can continue for quite a long time, up to several years in a row.

Open devaluation most often causes a decrease in commodity prices, but a closed devaluation, on the contrary, provokes their rapid growth.

Examples of economic devaluation

A striking example of devaluation in Europe is the sharp fall in the pound sterling and the Italian lira in the early 1990s (12% and 7% against the German mark, respectively). After that, by the way, both Italy and the UK announced their withdrawal from the European Monetary System.

In what year was the devaluation of the ruble? There have been at least three such episodes since 1991: in 1994, 1998 and 2014. The ruble, by the way, is one of the oldest European currencies. For the first time its course was determined in the XIII century. However, today it can hardly be included in the list of European hard currencies.

The day of October 11, 1994 entered the history of Russia as "Black Tuesday". Then the Russian ruble made a steep dive, collapsing by as much as 27% in one day. The country plunged into a period of chronic inflation and a prolonged economic crisis. By the end of 1996 for one dollarThe United States gave about 5500 thousand rubles! The following year, the government of the Russian Federation carried out a denomination, dropping three decimal places from this huge amount.

The last devaluation of the ruble is still fresh in the memory of many Russian citizens. It happened at the end of 2014. In general, this year the Russian ruble has lost half of its value (the exchange rate has fallen from 34 to 68 rubles per dollar). The fall in oil prices and international sanctions against the backdrop of the country's resource-based economy were the main reasons for this devaluation.

The devaluation of the ruble in 2014 shocked many. But everything, as they say, is known and realized in comparison. So, in Turkey, the lira has been falling continuously for two decades (from 1980 to 2002). During this time, the local currency exchange rate has overcome the path from 80 to 1.6 million lira per dollar.

Benefits of devaluation

In the minds of many people, the stereotype that devaluation is a real disaster and catastrophe for the national economy is firmly entrenched. However, this is not quite true. Rather, devaluation is not always bad and not for everyone. Let's look into this issue in more detail.

First of all, during the devaluation, the demand for domestic products grows. The explanation is simple: the owners of a depreciated national currency can no longer afford imported goods and are beginning to look closely at similar products produced at home. This can ultimately lead to an increase in the competitiveness of the national economy. But only if the authorities simultaneously carry out real and structural reforms.

There are a few morepossible positive moments of devaluation. Among them:

Growth in domestic production.
Reducing the balance of payments deficit.
Reducing the rate of waste of the state's gold and foreign exchange reserves.

Who is at a loss and who is at a profit?

Benefit from the devaluation, in the first place, exporting companies that pay taxes and wages to their workers in national currency, and receive revenue in foreign currency. In particular, the economies of those countries whose production is focused on the export of raw materials and cheap products turn out to be winners. Here it is appropriate to cite China as an example. As soon as the Chinese economy began to slow down, the country's government immediately began to artificially devalue the yuan.

All other market participants, alas, can be classified as losers. And the most vulnerable are ordinary ordinary citizens, directly affected by rising prices for consumer goods. Devaluation always hits them the hardest.

Conclusion

What is devaluation? In simple words, this is the process of depreciation of national money in relation to foreign hard currencies (euro, dollar, Japanese yen, British pound). The opposite process to devaluation is called revaluation.

Among the main reasons for the devaluation are the following: wars, sanctions, capital outflow, reduction in bank lending to businesses, lower prices for raw materials exported abroad. Devaluation can lead to rather sad consequences. ATin particular, it significantly reduces the level of public confidence in the domestic currency, devalues people's long-term savings, and leads to a total depression of entrepreneurial and financial activity in the country.