Eli5: What does devaluation of a currency mean? How does deliberate devaluation helps a country economically?
In: Economics
Devaluation means a currency is worth less than it was. If I exchange my pounds for dollars or euros I don’t get as many as I used to. It has the effect of making imports more expensive and exports cheaper.
It’s generally done – or happens due to the market – when a country has a balance of payments deficit. This means it’s importing more than it exports. This drains reserves of foreign currencies, gold, and potentially anything else that can be sold off to other countries. If these reserves run out you’re in big trouble.
By discouraging imports and encouraging exports devaluation can balance things. The main cost is that imports cost more, potentially increasing costs for consumers, industries that need imports, etc..
(The flipside of this is that a country with a persistent balance of payments surplus is missing out on domestic consumption or investment.)
There are other things a country can do that have the effect of devaluing a currency – eg. reducing interest rates – but since devaluation is a side-effect not the main purpose I won’t go into them.
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