Devaluation by hadiqa

Currency Devaluation vs Currency Overvaluation

HADIQA AAMER

M.SC. ECONOMICS

13-ARID-3412

ECON - 730

Exchange Rate

Exchange Rate is the price of one currency in terms of another.

Interbank closing rates for dollar on 02-03-2009

Buying Rs 79.88

Selling Rs 79.92

(1 EUR=1.5 CAD) It means 1 Euro =1.5 Canadian dollar

so 1.5 is the price at which we can buy Euro in Canadian dollar.

Exchange Rate Regimes In a fixed exchange rate system foreign central banks stand ready to buy

and sell their currencies at a fixed price in terms of dollar.

In a flexible(floating) exchange rate system, the central banks allow the exchange rate to adjust to equate the supply and demand for foreign currency.

When central banks intervene to buy and sell foreign currencies in attempts to influence exchange rates the system is known as managed floating or dirty floating.

“Devaluation” means official lowering of the value of a country's currency within a fixed exchange rate system, by which the monetary authority formally sets a new fixed rate with respect to a foreign reference currency. (Supply increased in response to decrease in price) In contrast, depreciation is used to describe a decrease in a currency's value due to market forces, not government or central bank policy actions.(Price is decreased in response to increased in supply)

Devaluation vs Depreciation of Currency

Devaluation vs Depreciation

A devaluation takes place when the price of foreign currencies under a fixed rate regime is increased by official action. Whereas, depreciation takes place when, under floating exchange rate regime domestic currency becomes less expensive in terms of foreign currency

Devaluation vs Depreciation

Supply increased in response to decrease in price

Price decrease by Government first.

Depreciation

Overvaluation vs Appreciation

 Revaluation/Overvaluation of a currency is 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.

Rise of currency to the relation with a foreign currency in a fixed exchange rate. In floating exchange rate correct term would be appreciation

Appreciation and Revaluation

A revaluation takes place when the price of foreign currencies under a fixed rate regime is decreased by official action. Whereas, appreciation takes place when, under floating exchange rate regime domestic currency becomes more expensive in terms of foreign currency.

Appreciation

How currency appreciates

A currency appreciates as a result of increased demand for that currency on world markets: its value in the world market increases. This increase in demand can occur for several reasons:1.When a country's exports are high, the buyers of these exports need its currency to pay for those exports.2.When the country's central bank increases interest rates, people will want that currency to deposit in the banks to earn that higher interest rate.3.When employment and per capital income in a country increase, the demand for its goods and services increases, along with demand for that country's currency in the local market.4.When the demand of the currency is high in foreign exchange market5.Due to Government borrowing or loosening of fiscal policy. See Twin deficits hypothesis

We can take same determinants for deprecation working in opposite direction as compare to appreciation.

For more information visit

www.Wikipedia.com

Regards By Hadiqa Aamer.