In this post, we shall look into devaluation and the effects it has on a country’s economy. By the end pf this lesson, students should be able to:
- define devaluation;
- mention the positive effects of devaluation; and
- highlight the demerits of devaluation.
Devaluation refers to the deliberate reduction of the value of a country’s currency in relation to the currencies of other nations in the global market.
Governments may choose to devalue their currency to achieve various economic objectives and to address issues related to trade imbalances and competitiveness.
Positive Effects of Devaluation
The following are the positive effects of devaluing a currency:
- Exports Become Cheaper: Devaluation makes a country’s exports cheaper for foreign buyers, as they can purchase more of the country’s goods and services with their own currency.
- Imports Become Dearer: Devaluation leads to an increase in the cost of imported goods and services, as more of the country’s currency is required to purchase foreign products.
- Increase in Exports, Reduction in Imports: Cheaper exports and dearer imports encourage consumers and businesses to favour domestic products over foreign ones, leading to an increase in exports and a reduction in imports.
- Improvement in the Balance of Payments: The increase in exports and decrease in imports result in an improved balance of payments for the country, as it earns more from exports than it spends on imports.
- Expansion of Local Industries: Devaluation can stimulate domestic industries by making their products more competitive in the international market, leading to increased production and investments.
- Creation of More Employment Opportunities: The expansion of local industries can create additional job opportunities, reducing unemployment rates.
- Increase in Standard of Living: As more jobs are created and the economy improves due to increased export earnings, the standard of living for the population can improve.
Negative Effects of Devaluation
While devaluation can have positive effects, it also comes with certain risks and challenges:
- Devaluation may lead to higher inflation, as the cost of imports increases, leading to increased consumer prices.
- It may also result in higher debt repayment costs for the country if it has borrowed in foreign currencies.
- Devaluation may provoke retaliation from other countries, leading to potential trade disputes and disruptions in international relations.