What does Devaluation stand for?

The act and consequence of devaluing is defined as devaluation. This concept refers to the action of reducing the value of a monetary system or another element or matter. For example: “The devaluation was necessary to get out of the economic crisis”, “The candidate opposed a new devaluation of the currency”, “After the devaluation, the price of houses multiplied”.

Devaluation consists of reducing the nominal valuation of a currency against other foreign bills. This change in value can have various causes, generally associated with the scarcity or absence of demand for the national currency and greater requirements for international currencies.

When consumers lack confidence in the domestic economy, they often turn to buying foreign tickets. This occurs because the foreign currency is considered to be a safer and more stable value than the local currency. As the demands for foreign currencies increase, they increase their price and devaluation occurs.

This situation is common in many Latin American countries. Citizens, concerned about the ups and downs of the economy, choose to save in dollars (the US currency). In this way, the devaluation of the local ticket of each country usually develops.

Devaluation is usually decreed by the country’s central bank. It should be noted that the currency has no real value (it has a representative value), so it is assumed that the currency is backed by the wealth of the country. When circulating banknotes exceed reserves, devaluation can be ordered to balance the situation.

The consequences of devaluation

When the devaluation of the currency in a country is decreed, there are always consequences.

The first thing that is noticed is the increase in the value of gold reserves held, which is expressed in the national currency.

Next, there is an alteration in the exchange rates that exist with respect to foreign currencies (this change is due to the fact that said currencies must be exchanged based on what the metal is estimated to be worth in the aforementioned territory).

And, how can it be otherwise, the third consequence is closely related to the previous ones. It has to do with changes in prices; in the first place of imported articles and in the second, of the national ones (since they are manufactured with imported or exportable objects). This stimulates exports and reduces imports, because the former receive a better profit than the latter.

There are, however, other types of less visible consequences, but not for that reason, less important. One of them is that the rest of the countries that belong to the same gold standard system, hinder the importation of the one that has devalued or cause their own devaluation to increase the currency of the country that has devalued and not lose in the commercial exchange.

A devaluation can be terrible for small merchants and individuals who reside in a certain place, however for exporters it can be an important source of enrichment, which is why in many countries many exporters do their part so that the your country’s currency declines and devaluation is declared in order to get better business and get rich.

Among those who are most affected by the devaluation are salaried employees, retirees (with their same salaries they will not be able to access the products that increase every day and will have to demand an increase or a revision of their contracts), those that are paying a debt in foreign currency but receive a salary in the national currency, companies that have a rate that is not reflected in the currency of the country.

Finally, it is worth mentioning that the devaluation will also cause a clear increase in communications between the country that suffers it and abroad, making freight, money transfers and telephone calls more expensive.