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devaluation

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 Japan, a decision may be made to devalue the U.S. dollar by 10%. Whereas previously one dollar may have been worth about 100 yen, a 10% devaluation causes it to be worth only about 90 yen. Such a move causes Japanese products to become more expensive for Americans and U.S. products to become cheaper for the Japanese. 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.

The Columbia Electronic Encyclopedia, 6th ed. Copyright © 2012, Columbia University Press. All rights reserved.

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