devaluation, Money, Banking, And Investment

Related Category: Money, Banking, And Investment

devaluation, decreasing the value of one nation's currency relative to gold or the currencies of other nations. It is usually undertaken as a means of correcting a deficit in the balance of payments. Although devaluation occurs in terms of all other currencies, it is best illustrated in the case of only one other currency. For example, if the United States is losing money in its trade with France, a decision may be made to devalue the U.S. dollar by 10%. Whereas previously one dollar may have been worth about 5.5 francs, a 10% devaluation causes it to be worth only about 5 francs. Such a move causes French products to become more expensive for Americans and U.S. products to become cheaper for Frenchmen. An ounce of French cologne that previously cost 55 francs in France and 10 dollars in the United States may still sell for 55 francs in France but will now cost 11 dollars in the United States. The net result of such a devaluation is that U.S. exports tend to increase and imports tend to decrease, thus helping to reverse the balance of payments deficit.

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