Part1A: http://dinarvets.com/forums/index.php?

/topic/21086-
currency-devaluation-and-revaluation/
Under a fixed exchange rate system, devaluation and revaluation are official
changes in the value of a country's currency relative to other currencies. Under
a floating exchange rate system, market forces generate changes in the value
of the currency, known as currency depreciation or appreciation.
In a fixed exchange rate system, both devaluation and revaluation can be
conducted by policymakers, usually motivated by market pressures.
The charter of the International Monetary Fund (IMF) directs policymakers to
avoid "manipulating exchange rates...to gain an unfair competitive advantage
over other members."
At the Bretton Woods Conference in July 1944, international leaders sought to
insure a stable post-war international economic environment by creating a
fixed exchange rate system. The United States played a leading role in the new
arrangement, with the value of other currencies fixed in relation to the dollar
and the value of the dollar fixed in terms of gold—$35 an ounce. Following the
Bretton Woods agreement, the United States authorities took actions to hold
down the growth of foreign central bank dollar reserves to reduce the pressure
for conversion of official dollar holdings into gold.

During the mid- to late-1960s, the United States experienced a period of rising
inflation. Because currencies could not fluctuate to reflect the shift in relative
macroeconomic conditions between the United States and other nations, the
system of fixed exchange rates came under pressure.

In 1973, the United States officially ended its adherence to the gold standard.
Many other industrialized nations also switched from a system of fixed
exchange rates to a system of floating rates. Since 1973, exchange rates for
most industrialized countries have floated, or fluctuated, according to the
supply of and demand for different currencies in international markets. An
increase in the value of a currency is known as appreciation, and a decrease as
depreciation. Some countries and some groups of countries, however,
continue to use fixed exchange rates to help to achieve economic goals, such
as price stability.

Under a fixed exchange rate system, only a decision by a country's government

or monetary authority can alter the official value of the currency. Governments
do, occasionally, take such measures, often in response to unusual market
pressures. Devaluation, the deliberate downward adjustment in the official
exchange rate, reduces the currency's value; in contrast, a revaluation is an
upward change in the currency's value.

For example, suppose a government has set 10 units of its currency equal to
one dollar. To devalue, it might announce that from now on 20 of its currency
units will be equal to one dollar. This would make its currency half as expensive
to Americans, and the U.S. dollar twice as expensive in the devaluing country.
To revalue, the government might change the rate from 10 units to one dollar
to five units to one dollar; this would make the currency twice as expensive to
Americans, and the dollar half as costly at home.

Under What Circumstances Might a Country Devalue?

When a government devalues its currency, it is often because the interaction
of market forces and policy decisions has made the currency's fixed exchange
rate untenable. In order to sustain a fixed exchange rate, a country must have
sufficient foreign exchange reserves, often dollars, and be willing to spend
them, to purchase all offers of its currency at the established exchange rate.
When a country is unable or unwilling to do so, then it must devalue its
currency to a level that it is able and willing to support with its foreign
exchange reserves.
A key effect of devaluation is that it makes the domestic currency cheaper
relative to other currencies. There are two implications of a devaluation. First,
devaluation makes the country's exports relatively less expensive for
foreigners. Second, the devaluation makes foreign products relatively more
expensive for domestic consumers, thus discouraging imports. This may help to
increase the country's exports and decrease imports, and may therefore help
to reduce the current account deficit.

There are other policy issues that might lead a country to change its fixed
exchange rate. For example, rather than implementing unpopular fiscal
spending policies, a government might try to use devaluation to boost
aggregate demand in the economy in an effort to fight unemployment.
Revaluation, which makes a currency more expensive, might be undertaken in
an effort to reduce a current account surplus, where exports exceed imports,
or to attempt to contain inflationary pressures.

Effects of Devaluation
A significant danger is that by increasing the price of imports and stimulating
greater demand for domestic products, devaluation can aggravate inflation. If
this happens, the government may have to raise interest rates to control
inflation, but at the cost of slower economic growth.

Another risk of devaluation is psychological. To the extent that devaluation is

viewed as a sign of economic weakness, the creditworthiness of the nation
may be jeopardized. Thus, devaluation may dampen investor confidence in the
country's economy and hurt the country's ability to secure foreign investment.

Another possible consequence is a round of successive devaluations. For

instance, trading partners may become concerned that a devaluation might
negatively affect their own export industries. Neighboring countries might
devalue their own currencies to offset the effects of their trading partner's
devaluation. Such "beggar thy neighbor" policies tend to exacerbate economic
difficulties by creating instability in broader financial markets.

Since the 1930s, various international organizations such as the International

Monetary Fund (IMF) have been established to help nations coordinate their
trade and foreign exchange policies and thereby avoid successive rounds of
devaluation and retaliation. The 1976 revision of Article IV of the IMF charter
encourages policymakers to avoid "manipulating exchange rates...to gain an
unfair competitive advantage over other members." With this revision, the IMF
also set forth each member nation's right to freely choose an exchange rate
system.

Read more: http://dinarvets.com/forums/index.php?/topic/21086-currency-devaluation-and-

revaluation/?s=f09a3e5dfb173c72387354bf3110fd45#ixzz14xeEdeyF

Part1B: http://www.economicshelp.org/blog/economics/advantages-
and-disadvantages-of-devaluation/

Advantages and Disadvantages of

Devaluation
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. Exports become cheaper, more competitive to foreign buyers. Therefore, this provides a
boost for domestic demand.
2. 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. Higher exports and aggregate demand can lead to higher rates of economic growth.

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

 Imports more expensive

 AD increases causing demand pull inflation
 Firms / 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:

 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
 Elasticity of demand. A devaluation may take a while to improve current account because
demand is inelastic in the short term.

Part2A: http://en.wikipedia.org/wiki/Revaluation

Revaluation
From Wikipedia, the free encyclopedia

Revaluation 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 Revaluation 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".

For 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.
Before the Chinese government revalued the yuan, it was pegged to the U.S. dollar. It is now
pegged to a basket of world currencies.

Tax revaluation 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.