Reduction in the external value of currency
Devaluation refers to a decrease in a currency’s value with respect to other currencies. Devaluating a currency by the government issuing the currency, and unlike depreciation is not the result of non-governmental activities. There are effects of a devaluation:
- Exports cheaper
- Imports more expensive
- Increased AD.
- Inflation is likely to occur because:
- Imports are more expensive causing cost push inflation.
- AD is increasing causing demand pull inflation
- With exports becoming cheaper manufacturers may have less incentive to cut costs and become more efficient. Therefore over time, costs may increase.