O level Economics Devaluation and Revaluation





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



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


  1. Imports become relatively  expensive and exports  become relatively  cheaper : this will  reduce  the  volume  of imports  and increase  the  volume  of exports 
  2. Devaluation may  initial   a cost  push  inflation
  3. The income of  foreign  countries  will fall   since  there  is  going  to  be reduction  in imports
  4. The balance payment situation may  be improve








This  is define  as a rise  in the exchange  value  of the currency  in terms  of the other  currencies  .







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.



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