A currency devaluation is a government policy tool that involves intentionally making the country’s money less valuable. The aim is to make exports cheaper and imports more expensive so that domestic goods gain competitive advantage in foreign markets. This can boost a nation’s economic growth and help with its trade balance. However, it can also lead to unchecked inflation and damage the economy over time.
14-18 year olds (9-12 graders, US) studying Social Studies and Economics
A nation’s currency is often a reflection of the economic health of the country. When a currency is weak, it usually comes from a cocktail of economic troubles – rampant inflation, political chaos, mountainous debts, and persistent trade deficits that make other countries lose faith in the country’s financial stability. The government may then resort to various monetary policies – including currency devaluation – to address these issues.
Devaluation lowers the value of a country’s currency in relation to major strong currencies such as the US dollar, euro, and British pound. When a currency is weak, it becomes easier for the country to compete in global markets and reduce its sovereign debt burdens by making its exports cheaper and its imported products more expensive. However, this can harm a country’s consumers by increasing inflation and reducing the real income of the population. It can also encourage other nations to engage in a race-to-the-bottom by devaluing their own currency, causing tit-for-tat currency wars that are harmful to the global economy.