Devaluation
Definition
Devaluation id define as the fall in the exchange value of a currency in terms of other currencies .In order words , devaluation is the lowering of the exchange rate between a country currency and other currencies .is reduces the rate at which the devalue currency is exchange for other currencies . Devaluation of a currency also means the depreciation of a currency
Example
The devaluation on FCFA
The original value of 1$ = 350 frs , The devalue value 1$ = 600frs
As seen above after devaluation good bought from America will become relatively expensive and good from Cameroon will become relatively cheaper .
Effects of devaluation
- Imports become relatively expensive and exports become relatively cheaper : this will reduce the volume of imports and increase the volume of exports
- Devaluation may initial a cost push inflation
- The income of foreign countries will fall since there is going to be reduction in imports
- The balance payment situation may be improve
Revaluation
Definition
This is define as a rise in the exchange value of the currency in terms of the other currencies .
Example
The Revaluation on FCFA
The original value of 1$ = 600 frs , The revalue value 1$ = 350frs
Reasons for revaluation
Countries often use currency devaluation for economic policies. Lowering of the home currencies as compared to foreign currencies will:
Improve exports. When the local currency is cheaper than the foreign currency, exports will be encouraged and imports discouraged. This is because foreign countries will find the prices of goods cheaper in the devaluing country. Caution should be however exercised to avoid the extensive exports that causes the effects of demand and supply that increases the prices of goods that could normalize the devaluation effect. Again other countries might find the trick and hence themselves also devalue their currency in the “race to bottom” that can, as a result, lead to inflation.
Shrink trade deficits. Devaluation helps solve the effects of trade deficit since it will cause a balance of payments since the exports will be higher than the imports.
Reduce a county’s debt burdens. If a government has sovereign debts to pay on a regular basis, and the payment of this debt is fixed, maintaining a weaker currency makes the debt less expensive over time. The same should also be done with caution as countries might resort to a race to bottom war nullifying the effect of devaluing.
