Devaluation

What is devaluation?

Devaluation is the loss or decrease in the face value of a currency compared to other foreign banknotes or coins.

The coins of each country represent a value that is related to the wealth of each nation, since the currency itself does not have a real value, but is a representative form.

In this way, the devaluation of the currency causes a series of both positive and negative effects. What's more, there are different types of devaluation, as well as various causes that cause it.

Causes of devaluation

The main causes for which a devaluation is generated are the following:

• Currency overvaluation local with respect to the foreign currency.
• Currency escape due to lack of investment of foreign capital.
• Lack of trust in local currency and politics.
• Deficit in the trade balance, that is, more imports than exports.
• Decision of the Central Bank of promote domestic production and lower imports.

Effects of devaluation

Devaluing a currency causes both advantages (positive effects) and disadvantages (negative effects).

positive effects

Main positive effects of the currency devaluation are the following:

• As the national currency devalues, exports become more competitive compared to those made with higher value coins.
• Get expand international tourism, as it attracts foreign people whose currency is worth more.
• If you revise the increase in wages, you can optimize internal spending on national products, since the products that are imported tend to be more expensive.

Negative effects

Devaluing a country's currency also produces certain Negative effects:

• Social discontent that can manifest itself in a political cost and an economic crisis.
• Large-scale increase in inflation.
• Loss of real value of salary.

Types of devaluation

Devaluation can be monetary, internal, competitive or fiscal.

• Currency devaluation: It is caused by a series of causes, including distrust in the local currency, which in turn causes various inconveniences such as increased inflation and public services.
• Internal devaluation: The authorities can implement this type of devaluation by making adjustments in rents, wages and deficit reductions, as well as improvements that contribute to productivity to regain lost competitiveness.
• Competitive devaluation: Also called currency war, its objective is to provoke a competition between two or more countries, in which each country tries to get its local currency to have a low exchange rate that is beneficial to it.
• Tax devaluation: This revolves around the alteration of the prices of different taxes and aims to achieve economic competitiveness to optimize exports and reduce production costs.