Thursday, February 19, 2015

Devaluation and Revaluation

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Devaluation of a country's currency means the deliberate attempt by the government through its monetary policy to decrease its value (currency's) with respect to foreign currencies. Note that the value is decreased by changing the foreign exchange rate.

Conversely, if the value is deliberately increased by the government by changing the foreign exchange rate of the currency, then it will be Revaluation of the currency.

Devaluation vs. Depreciation
Both Depreciation and Devaluation decreases the value of the country's currency with respect to other currencies (generally a major foreign currency, like USD, etc). But the difference lies on the driving factor -
Depreciation occurs depending on the market forces of the world economy, whereas Devaluation is the result of government's deliberate attempt to reduce its value.

Devaluation vs. Redenomination
If the face value of the currency is changed (reduced, or increased), without changing the foreign exchange rate, then it will be known as Re-denomination. It is neither a devaluation nor a depreciation.
Note that for devaluation or depreciation, foreign exchange rate will be changed.

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