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Readers question: what are Advantages and Disadvantages of Devaluation?

Devaluation is the decision to reduce the value of a currency in a fixed exchange rate. The £
Sterling has been depreciating in value since the middle of last summer and provides a practical
example.

Advantages of Devaluation

1.c Exports become cheaper, more competitive to foreign buyers. Therefore, this provides a
boost for domestic demand.
2.c Higher level of exports should lead to an improvement in the current account deficit. This
was important in the case of the UK who had a large current account deficit of over 3%
of GDP in 2008
3.c Higher exports and aggregate demand can lead to higher rates of economic growth.

Disadvantages of Devaluation
1. Is likely to cause inflation because:

Oc Imports more expensive


Oc AD increases causing demand pull inflation
Oc ¢irms / exporters have less incentive to cut costs because they can rely on the devaluation
to improve competitiveness

2. Reduces the purchasing power of citizens abroad. e.g. more expensive to holiday in Europe.

3. A large and rapid devaluation may scare off international investors. It makes investors less
willing to hold government debt because it is effectively reducing the value of their holdings.

Note It depends on:

Oc State of business cycle ± In a recession a devaluation can help boost growth without
causing inflation. In a boom a devaluation is more likely to cause inflation
Oc Elasticity of demand. A devaluation may take a while to improve current account because
demand is inelastic in the short term.

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 means a rise of a price of goods or products. This term is specially used as
revaluation of a currency, where it means a rise of currency to the relation with a foreign
currency in a fixed exchange rate. In floating exchange rate correct term would be appreciation.
The antonym of revaluation is devaluation. Altering the face value of a currency without
changing its foreign exchange rate is a redenomination, not a revaluation.

In general terms  


 means a calculated adjustment to a country's official exchange rate
relative to a chosen baseline. The baseline can be anything from wage rates to the price of gold
to a foreign currency. In a fixed exchange rate regime, only a decision by a country's government
(i.e. central bank) can alter the official value of the currency. Contrast to "devaluation".

¢or example, suppose a government has set 10 units of its currency equal to one U.S. dollar. To
revalue, the government might change the rate to five units per dollar. This would result in that
currency being twice as expensive to people buying that currency with U.S. dollars than
previously and the U.S. dollar costing half as much to those buying it with foreign currency.
4efore the Chinese government revalued the yuan, it was pegged to the U.S. dollar. It is now
pegged to a basket of world currencies.

 
 is the adjustment of the tax level to slow or stop the rise in tax-revenue as the
price of a taxable asset increases. This is considered a fiscally conservative measure to encourage
spending. One common usage is the tax revaluation of real estate property to counter a rise in
land value. This way, even as property values rise (whether due to increased demand, better
government services, or inflation), residents and businesses still pay the same amount of money.