Eli5: What does devaluation of a currency mean? How does deliberate devaluation helps a country economically?
In: Economics
If I have $5 and want to buy a beer in Britain, I’m going to have to exchange the $5 for £3.65, and then give that money to the store owner, since he won’t take dollars. Usually, the ratio of that exchange is based on market forces: if lots of Americans want to buy British products, they are going to try to outbid each other when offering to exchange dollars for pounds, and the value of the pound will go up with respect to the dollar.
If a government wants, they could interfere by “pegging” their currency to another at a set exchange rate, saying “We are going to buy pounds for $2 each, no matter what.” Then, the value of $5 would decrease from £3.65 to £2.50. The economic advantage of this is that Americans are less likely to buy the British beer that just got more expensive for them, and buy local instead. And British people suddenly are getting a discount if they decide to buy American electronics, so they will import more from American manufacturers. It leads to a temporary boost to local industry, but also risks inflation and other financial problems.
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