Remember 2008 and how unstable the Russian economy was then, and 2013 and 2015? Devaluation, inflation, denomination, revaluation, stagnation… Already confused in the abundance of these unfamiliar economic concepts? Let's get out of the impenetrable economic jungle together.
Term definition
In simple terms, devaluation in the economy is the process of falling (or depreciation) of the currency of a certain state relative to the value of banknotes of other countries. You can express this thought even more accessible. You should definitely understand what devaluation is. In simple terms, this is a phenomenon in which (conditionally) today and tomorrow (yesterday and today) for the same amount it will be possible to purchase a smaller amount of goods and services on the world market.
Criterion
The main criterion by which experts determine the beginning of the process is the decrease in the value of national money relative to some hard currency. To date, the devaluation of the national currency is detected against the US dollar and the euro.
Floating andfixed rate
Natural fall in the value of the country's currency, which is the action of market factors, occurs when its rate is floating. In this case, the Central Bank has only an indirect opportunity to influence quotes through foreign exchange interventions (currency interventions are some operations that are carried out by government agencies in order to influence the national currency exchange rate). However, such an option is also possible, when devaluation in the economy is an accomplished task of the government in this area. And this situation is more related to a fixed exchange rate.
The situation in Russia
Devaluation in Russia today is to change the quotation of the banknote within the established limits of a clear range. Otherwise, it is called a currency corridor. What is the devaluation of the ruble in simple terms? It is better to ask the representatives of the Central Bank. After all, it is this organization that oversees this process in our state. Moreover, sometimes the reduction in the value of Russian banknotes is carried out openly - the Central Bank officially announces the devaluation of the ruble. The hidden option is more characteristic of natural depreciation and occurs through a gradual decrease in the actual price of money.
It is important to define what devaluation is as a positive thing. An open version of this process is often used to stabilize the financial and economic situation nationwide.
Inevitable Consequences
What is devaluation as a guidelinethe economy of a certain state, which leads to both positive and negative results? Consequences of the process have the following positive characteristics:
- decrease in the actual purchasing power of monetary units;
- improvement of export conditions;
- increase in demand for domestic products;
- decrease in the balance of payments deficit;
- stimulating domestic production.
The characteristic negative consequences are as follows:
- accelerated inflation;
- formation of unfavorable import conditions;
- declining public confidence in the national payment unit;
- decrease in total investment in the state economy;
- widespread depreciation of bank deposits (except for multi-currency accounts or deposits in dollars and euros);
- "financial depression" (unfavorable financial changes in both the public and private economy).
As you can see, surprisingly, there are approximately the same number of positive and negative consequences of such processes within the state. Understanding this fact explains more clearly why the depreciation of the national currency controlled by the Central Bank can be a targeted method for implementing state policy in the economic sphere. In simple terms, devaluation is a strategy.
Benefit
What is a beneficial devaluation? This phenomenon is typical for countries that are primarily export-oriented,with a wide range of goods and services they produce. Now let us explain the mechanism for extracting benefits from this economic process. First, there is a decrease in various kinds of costs within the state (the most understandable and typical example is with the costs of labor resources (labor)), the costs are followed by a decrease in prices for exported services or goods. Accordingly, their competitiveness in the foreign market is growing quite quickly and seriously.
The state that managed to extract the highest possible dividends from the depreciation of the currency planned by itself was China. The functioning of the domestic economy gradually began to slow down in the country, followed by a decrease in the volume of export deliveries. How did the Chinese authorities react? The yuan was devalued. This bold move quickly led to clear positive effects on the economy of the entire country.
Harm
Economic processes can also lead to a decrease in the speed of internal economic movements, an increase in unhe althy social activity due to a general decline in living standards, and many more adverse consequences. Not an exception, as we have already seen, and our case. Let's explain all this in simple words: devaluation can cause real damage to the country's economy.
This is certainly a harmful phenomenon if the country is already experiencing high inflation. Everything is extremely simple here - the depreciation of the national currency will not be able to bring the state out of the crisis, but will only add to inflationary influences unnecessaryinterest.
There is another option, when currency depreciation is a process that cannot lead to positive results. High and developed imports and absolutely inefficient exports of goods and services, in conjunction with devaluation, will definitely lead to immediate crises.
Unfortunately, Russia can be considered in both cases. What is it?
- 2013 - the period of inflation in Russia, in which it amounted to almost 6.5% (so that you understand the seriousness of the situation, let's denote the figures characteristic of "he althy" inflation - this is 1-3%).
- Food, services, technology and even "minds" are included in the line of Russian imports.
- Export in our state, of course, is present, but only its main source is hydrocarbons. This type of export accounts for as much as 63% of all income received from external supplies.
The phenomenon of Russian reality
Let's talk directly about the topic of interest to us. 2014 (as well as the following 2015) is the year of devaluation in Russia. During this period, it was completely unnecessary to explain what kind of phenomenon this was, because everyone understood the essence of the process perfectly well. In 2014-2015, there was a real collapse of the ruble by 100%, the exchange rate of the Russian payment unit fell from 34 exactly twice, to 68 rubles per one US dollar. Now you can clearly see that the acceleration of inflationary processes by more than two times is a natural phenomenon. As we mentionedhigher, in 2013 inflation in the Russian Federation amounted to just under 6.5%, in 2014 it increased to a seemingly incredible 11.36%. But this did not become the limit. 2015 was marked by an increase in inflation to a catastrophic level of 16%.
Winners and losers. Results for the country and its citizens
Devaluation can be imagined as a kind of game of foreign policy partners and antagonists, and in any game there are winners and losers. In our case, first of all, all exporters benefit. Now they can receive increased foreign exchange earnings, exchanged for rubles at an increased rate (after all, they pay wages to their employees and taxes to the state in rubles). In the Russian case, this is predominantly the oil and gas industry, although so far it has only managed to compensate for its own losses from falling oil prices. Also, active participants in the games with bank foreign currency accounts can benefit from the devaluation.
Who is inferior in this game? In fact, everyone else. Ordinary consumers, who make up the bulk of the country's population, are losing out due to higher prices in stores (including those for essential goods). This process also brings little joy to domestic producers who supply goods primarily to the domestic market - citizens receive less, which means they cannot buy much (their purchasing power decreases).
Devaluation and inflation
People often confuse the concepts of "inflation" and"devaluation". Let's dot all the i's.
Inflation is a long-term, steady and systematic increase in the general price level. In connection with the increase in prices, which is quite logical, the volume of goods and services that the consumer can purchase decreases. As a result, we are faced with the depreciation of money in the country. The consequence of inflation is a reduction in the cost of national payment units within the state (perhaps only within a certain region). With devaluation, national banknotes lose their value on an interstate scale.
These two economic processes are connected with each other by one more point. Devaluation most often raises inflation rates.
Devaluation, stagnation and denomination
Let's move on to a new level of differentiation of seemingly similar concepts. First things first.
Stagnation
Stagnation is nothing but a frank stagnation in the state economic development, which manifests itself in a constant decrease in the rate of economic growth, and the values of the rate of this development tend to zero. The criterion for identifying and tracking stagnation is the increase in gross domestic product in one year. With obvious stagnation, this economic indicator takes (relative to the gross domestic product of the past year) values from 1% to 0%. Growth values may turn out to be negative, and this, in turn, indicates an economic recession (a slowdown and a decline in production).
Let's turn to the opinion of experts in the economic sphere. Specialistsargue that economic growth per year, in the absence of any "diseases" (he althy economy), has a value of 3-5%. Now we understand why stagnation acts as a sign of problems in the state economy, very often it is replaced by an economic crisis.
Denomination
Such a phenomenon as a denomination is characterized by a change in the denomination of banknotes. This is done in order to simplify the settlement procedure, followed by the stabilization of the national currency. Quite often, the denomination entails such a state of the country's economy as hyperinflation. With this option, obsolete banknotes are denominated. Updated money has lower nominal values. This, in fact, is the essence of the denomination as an economic phenomenon.
Revaluation
We have already figured out what devaluation is, but have you heard about revaluation? Revaluation is an increase in the exchange rate of the national currency relative to the monetary units of other states. Revaluation, first of all, leads to a decrease in the cost of goods and services of imports and, accordingly, an increase in the price of exported products.
Consequences of revaluation
Revaluation objectively increases the cost and value of the national currency. It stabilizes, then growth is stimulated. In the overwhelming majority of cases, the state is the initiator of the revaluation.
In addition, through the methods of revaluation, the cost of goods and services rises, the demand for certain types of products grows. WhereinAs a result, only decisive actions of the state can lead to any truly significant events. These include:
- persuading manufacturers to make smaller volumes;
- decrease in total exports through a preceding reduction in production;
- closure of industrial plants and other businesses.
As we understand, the increase in the value of the national currency means that this state has the opportunity to buy the currency of another country at a much lower price. Such an economic measure is forced. Its implementation is resorted to if the interest of exporters is more significant than the influence of debtors.
