Currency Devaluation Example


In the analysis below we accept the figures reported in the IMF International Financial Statistics at face value. Economic policy research by the Institute’s 50+ internationally recognized scholars is the foundation of our mission and work. Regardless, with China now officially a “currency manipulator,” the risk of increased sanctions continues to turn the heat up on a trade war that has only gotten hotter as of late. Interest rates are an example of one factor that can change a currency’s value. In a worldwide society, such a large drop in the market of a big economy inevitably has repercussions. The revelation also had a detrimental effect on the Indian rupee as well as the share market.


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China trade war, but certainly not the first time China had devalued its currency. On August 5, 2019, the People’s Bank of China set the yuan’s daily reference rate below 7 per dollar for the first time in over a decade. This, in response to new tariffs of 10% on $300 billion worth of Chinese imports imposed by the Trump administration, was set to go into effect Sept. 1, 2019. Global markets sold off on the move, including in the United States, where the Dow Jones Industrial Average lost 2.9% on its worst day of 2019 up to that date. The government of a country may decide to devalue its currency.

What are the effects of devaluation?

Social and environmental responsibilities have been integrated into their products and services. Clearly, supplying this much energy will not be an easy task. Shows the uneven distribution of energy utilization rate throughout the world; 72% of the world population uses less than 2 kW/capita, whereas 6% of the population uses more than 7 kW/capita.

  • In the case of China , its exports shrink and imports grow steadily through the first eight experiments until experiment 9, where it experiences a 10 percent real depreciation.
  • He claimed that this exports inflation to the emerging market economies.
  • As an example, the drastic oil price drop between 2014 and 2016 caused a mini-recession.
  • Is the difference between exports and imports of the company.
  • Deflation is rare, and generally only occurs during a deep recession .

Complete trade flow matrices for all trade partners are part of the model solution. The important reason why nations devalue their currency is because of foreign exchange imbalances. The use of currency and devaluation could negatively impact, the value of a country’s export markets, which in the long run makes them more competitive on a worldwide scale. It therefore follows that net effect of devaluation on the balance of trade could go either way.

The grey area between currency devaluation and currency manipulation

Those examples are not technically devaluations, although many people incorrectly use the terms depreciation and devaluation interchangeably. Devaluation is a deliberate reduction in exchange rates by a central bank or government. That process is much less common these days, since the International Monetary Fund coordinates currency exchange rate policy. A currency peg is a policy in which a national government or central bank sets a fixed exchange rate for its currency with a foreign currency.

Central banks can also add credit to the reserves of the nation’s banks. This is the concept behind open market operations and quantitative easing. Currency wars also encourage investment in the nation’s assets.

Nevertheless, some solutions are really only short term remedies and do not solve the underlying economic problems. When the currency is weak, it is easier to repay the debt because the debtor has fewer inflationary effects to deal with, and domestic products become cheaper. It makes imports more expensive and encourages locals to spend locally. However, if the country’s currency is strong, it becomes more expensive to export products outside the country.


We’re also a community of that support each other on our daily trading journey. Free trade, in theory, is the ideal situation in which individuals and companies in different countries can buy and sell goods to and from each other without any interference from governments. Robinhood Securities, LLC , provides brokerage clearing services. All are subsidiaries of Robinhood Markets, Inc. (‘Robinhood’).

Examples of devaluation

It also makes imports more expensive, providing a disincentive for domestic consumers to purchase imported goods, leading to lower levels of imports , but which reduces the real income of consumers. Devaluation tends to improve a country’s balance of trade by improving the competitiveness of domestic goods in foreign markets while making foreign goods less competitive in the domestic market by becoming more expensive. However, the devaluation increases the prices of imported goods in the domestic economy, thereby fueling inflation.

  • This increase in exports presents an improvement in the balance of payments on the nation’s current account.
  • The figures on US bilateral exports and trade balances from Table 3 have been combined with the 7.1 regression results to generate projections of US trade attention.
  • If these loans are priced in home currency, currency devaluation may lead to an increase in the debt burden.
  • Devaluation is when a country’s government intentionally reduces the value of its currency.
  • Imports into India from abroad would be more costly because as a result of devaluation a hundred rupee note will buy fewer US dollars and pound sterling’s than before.
  • The mission of the Applied Macroeconomics and Econometrics Center is to provide intellectual leadership in the central banking community in the fields of macro and applied econometrics.

The effect of devaluation is an increase in exports, a decrease in imports, it can make government debts less expensive in the long run, and it encourages a reduction in the recessionary gap. The effect of revaluation is to increase imports and decrease exports, which helps close the inflationary gap by reducing aggregate demand. Devaluation is when the value of a currency, that has been pegged to a foreign currency under a fixed exchange rate, is reduced. Adjustments of the exchange rate, like its devaluation and revaluation, are usually performed by a nation’s monetary authority like its central bank which is controlled by its government. A fixed exchange rate, where the government sets the exchange rate, or pegs it, at a certain value of a foreign currency. This scenario is where we get devaluation and revaluation of a currency from.

Aggregate demand causes demand-pull inflation, and manufacturers may have less incentive to cut costs because exports are cheaper, increasing the cost of products and services over time. The simulation results reported in the previous section have obvious relevance from this standpoint. The figures on US bilateral exports and trade balances from Table 3 have been combined with the 7.1 regression results to generate projections of US trade attention. As shown in Table 9, these results indicate that under EXP 9 there would be a 14 percent increase in attention devoted to trade problems in Asia, with Japan and Korea taking the most prominent roles. Similarly, the results in regression 7.4 can be used to project the increased likelihood of formal trade actions. Of course the sample period of the underlying model was not a crisis period.

devalue their currencies

Consequently, there are a handful of examples of devaluation occurring in the modern landscape. Often, this occurs because a country’s existing fixed exchange rate can’t be sustained with existing foreign exchange reserves, or to alter the balance of trade. China manages its currency a little differently than most countries.

A lot can weigh on the exchange rate between one currency and another, raising questions about when currency fluctuations are, in fact, currency manipulation. Here are some advantages and disadvantages after understanding the devaluing meaning of the currency. Firstly, if they have huge sums of loans, that hampering the economy. Decreasing the value of the currency, it’s going to make debt bills less expensive over time.

Italy’s Approach to Inflation

This includes transportation by car, plane, heating and cooling, illumination, food, farming, transport of goods, manufacturing, and public services, among others. Rough plot of historical increase in the per capita energy utilization rate. Reported that the price of fertilize has a negative imp act on rice productivity because farmers tend to reduce fertilizer usage when the price of fertilizer increases. The price of fertilizer almost doubled after the economic crisis.

Although the devaluation was welcomed by the International Monetary Fund, it led the United States Department of the Treasury to label China as a currency manipulator in 2019. On 5 August 2019, China devalued its currency in response to the imposition of trade tariffs by the United States against China. By 1949, in part due to a dock strike, the pressure on UK reserves supporting the fixed exchange rate mounted again at a time when Cripps was seriously ill and recuperating in Switzerland.

Asian Competitive Devaluations

LoansA loan is a vehicle for credit in which a lender will give a sum of money to a borrower or borrowing entity in exchange for future repayment. Issued by a country if investments are high from FIIs and interest to be paid are fixed amounts. BondsBonds refer to the debt instruments issued by governments or corporations to acquire investors’ funds for a certain period. Exports are those products or services that are made in one country but purchased and consumed in another country.

Brian Cheung is a reporter covering the industry and the intersection of finance and policy for Yahoo Finance. When the PBOC loosened the lower bound of its yuan band in August 2019, the USD/CNY spiked above 7, suggesting that China is not manipulating its currency to push the yuan down, but rather to keep the yuan propped up. So, Inflation is factored in because the carriers are confronted with higher import charges, which causes them to increase charges and market charges as well. In 2016, the euro weakened as a consequence of Brexit, where the residents of the United Kingdom voted to exit the European Union.

A number of projects related to agriculture, education, health, employment, and other welfare-improvement activities have been carried out through the JPS program. Recently, a poor household was given Rp 300,000 in cash every 3months, as well as 10kg of subsidized rice per month at 75% of the price by presenting a “kartu miskin” to the nagari’s officials. The kartu miskins are issued by the nagari administration to categorized poor households. The card also needs to be shown when they need health care services for free in Puskesmas and when they make a request for a scholarship and an allowance for their childrens’ education.


As a result, given the short-run aggregate supply curve the levels of GDP and price level increases. Thus a devaluation or depreciation can therefore serve as a stimulus to the economy. Aid conditions were heavily criticized, for undermining the sovereignty of aid-recipient countries and were regarded as interfering in economic decisions and policy making.

Lowering of the value of a currency of a country tends to raise its exports by making its goods cheaper for foreigners. On the other hand, devaluation or depreciation makes the imports from abroad expensive in terms of domestic currency and therefore the imports tend to fall. In country A inflation is at 10%, in country B inflation is also at 10%. In both countries, prices of goods increased by 10% and purchasing power in both countries decreased. But relative to each other, the value of currencies has not changed. The fourth stage begins with the realization that the introduction of market reform does not necessarily or automatically lead to many of the expected benefits and outcomes.

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