Devaluation and revaluation – In the world of the world economy, there are many terms that we often encounter. In fact, conditions such as an increase and decrease in the value of the local currency against foreign currencies or vice versa are conditions that we certainly have encountered.
Where the increase or decrease in the local currency is more widely known as devaluation and revaluation. Compared to these two terms, perhaps people are more familiar with the fluctuations in the value of the local currency against the value of foreign currencies.
Of course, the existence of devaluation and revaluation has its own purpose. However, do you already know what is related to devaluation and revaluation? If not, you don’t need to worry about this because this article will explain more things related to these two terms in the world of economics. So, keep reading this article, until it’s finished, Sinaumed’s.
Definition of Devaluation
The first thing we will discuss together is the meaning of devaluation. Devaluation itself is a decrease in the value of a country’s currency by the government in relation to another country’s currency.
Conditions of devaluation can occur because of monetary policy which sets a benchmark exchange rate against foreign currencies. Basically, the devaluation policy is a step to improve the existing economic situation in a country. The devaluation policy will usually be carried out to be able to respond to economic conditions that have given the country an adjustment to the devaluation.
Quoted from the Big Indonesian Dictionary or KBBI, devaluation is a deliberate reduction in the value of local currency against foreign currencies and gold. The existence of devaluation aims to improve the existing economic conditions in a country.
In addition, devaluation is also used to reduce a country’s export costs so that it is finally able to increase competition in the global market and can reduce the intensity and cost of imports at the same time.
The existence of a devaluation policy will also have the potential to encourage greater export activities because goods sold in foreign currencies abroad will be cheaper in price compared to using local currency whose value is in a declining condition. That way, it can automatically be said that with the devaluation will be able to increase foreign demand.
Even so, devaluation will cause the currency to weaken, so import activities will also decrease. This is none other than because the purchase price is getting higher. When the intensity of imports decreases, this will indirectly lead to export growth and increase spending on domestic products by the public.
The point is that devaluation conditions will have quite a broad influence on a country’s economy, especially those related to the international trade sector. Where these conditions will also have an impact on the long term, even in the medium term.
Causes of Devaluation
Devaluation is a condition of decreasing the value of local currency against foreign currency. Several factors can cause the issuance of a devaluation policy in a country.
1. Balance of Payments Deficit
One of the main causes of devaluation is related to the balance of payments deficit. Where when the amount of a country’s payments is greater than the amount of receipts, it will eventually put pressure on the economy at a broader level.
The condition of devaluation will have an influence on people’s consumption behavior. The existence of dependence or the public’s need for foreign products that are so high can cause the level of payments abroad to also be higher.
2. High Import Activity
If import activity is high, if it is not matched by export activity, it will have an impact on the intensity and volume inequality of local currency exchanges against foreign currencies. An example is the exchange from Rupiah to US dollars.
Where conditions like this will eventually make the buying rate of the dollar increase but the value of the Rupiah will decrease, leading to domestic inflation. When the condition of the devaluation policy exists, it can act as a countermeasure to this pressure and as a form of effort to restore a country’s economic stability.
3. Restricted Export Practices
Not only because of the high level of imports, devaluation can also occur due to export practices which tend to be very limited and fixated on basic ingredients or food ingredients only. This does not provide significant added value.
4. The Country’s Economy is Getting Worse
In addition, devaluation can also be caused by a country’s economic situation that is getting worse due to the relatively high unemployment rate. The existence of a devaluation is expected to be one of the government’s strategies in improving the economy of a country.
As previously explained, devaluation is a monetary policy condition held to respond to a weakening economic situation in a country. With the existence of a devaluation policy, the country’s government is trying to give a boost to export activities, but this policy will also limit import activities.
There are several specific purposes for holding a devaluation policy which you can read below.
- Strengthening a country’s economic conditions by using local products that will be able to compete, both at home and abroad. With the increase in the price of imported products, people will automatically use more local products.
- The devaluation will also help local products dominate the market more and will also encourage the creation of a healthier economic climate. This can happen because of an increase in consumption of local products which at the same time can spur a more competitive domestic business climate.
- The devaluation policy was able to encourage export activities and limit import activities. The goal is to make it easier to improve the balance of payments or the balance of costs in order to reach an equilibrium or ideal point. Where the ideal point is the condition of the country’s economy which is getting healthier with a more balanced intensity and value of imports and exports.
- A devaluation that is able to balance the balance of payments can eventually create a balance in the foreign exchange rate, so that it becomes more stable than before. In addition, the devaluation policy can also trigger an increase in the country’s foreign exchange reserves.
From an economics point of view, the devaluation policy aims to stabilize currency exchange rates which can also help boost the domestic economy. Therefore, for the general public and business actors, the devaluation policy will be able to have quite a big influence on various things.
As previously explained, devaluation can increase the value of the exposure. Then, when this happens, domestic production activities will also increase so that it requires resources in the production process being carried out. This also encourages the opening of greater job opportunities.
Then, the devaluation policy can also increase output in the medium and long term. Where later there will be an increase in production indicating more and more business movements so that many investment schemes and new investment are opened in the country.
Impact of Devaluation
After knowing the purpose of the devaluation policy, next we will discuss related to the impact provided by the devaluation policy. The reason is, there are several impacts of the devaluation policy that will occur.
So, for more details, here are some of the impacts of the devaluation policy.
1. Suppressing the Amount of Imported Goods
By implementing a devaluation policy, in the end it was able to change the mindset of the people to use local products compared to using foreign products. This makes the devaluation policy more able to increase the use of local products and reduce the number of imported products in the domestic market.
2. Increased Export Activities
When a country implements a devaluation that makes the value of the local currency lower than the value of foreign currency, then the devaluation policy can also make the price of local goods considered cheaper by foreigners. This will encourage increased demand for local products by foreigners, so as to increase domestic export activities.
3. Making Local Products Able to Compete Overseas
When the people of a country decide to use local products, this condition will encourage the quality of local products to be better. In addition, local products are also able to compete in international markets at more affordable prices.
The existence of good quality, low prices and a wide selection of products makes foreigners prefer to use imported products at affordable prices which also have the best quality compared to using local products which tend to be more expensive.
4. Increasing State Foreign Exchange
When local products are able to compete in the international market and are widely used by foreigners, this condition will increase domestic export activities. Where an increase in export activity can have a positive impact on a country. Then, later the domestic foreign exchange will increase along with increased export activity.
A devaluation policy that can increase the country’s foreign exchange can be used to establish many companies so that they can create more new jobs.
5. Balance of Payments is More Balanced
From the existence of a devaluation policy, a balance of payments will be created. Where an increase in foreign currency will be able to cause domestic export activities to increase and import activities to decrease. As a result of this condition, the trade balance will also experience a deficit and eventually the balance of payments will also be in a deficit.
Definition of Revaluation
After knowing the meaning of devaluation, next we will learn about the meaning of revaluation. Strictly speaking, the revaluation condition is the opposite of the devaluation condition.
Where revaluation is a policy that will be issued by the government in increasing the local currency against foreign currency. In addition, another opinion states that revaluation is a policy of adjusting the currency value upwards officially in a country against the selected baseline. Where the baseline can have coverage on wage levels, gold prices and foreign currencies.
A revaluation policy can be issued by the government with the aim of improving a country’s economic condition. That way, it can also mean that there is intervention by the government to maintain the value of the domestic currency to remain stable.
In general, a revaluation can indeed give a sign that a country is getting better. Even so, on the other hand the revaluation policy will have a negative and positive impact on a country, especially on the people’s economy related to the import and export sector.
In essence, a revaluation will have an impact on the local currency exchange rate and thus affect the amount of prices that will be paid or received by business actors in the import and export sectors.
Causes of Revaluation
Revaluation policies can occur due to various triggering factors. Several causes of revaluation are such as changes in interest rates between countries and major events that can affect economic conditions, such as profitability and competitiveness.
Revaluation can also be caused by a change in leadership in a country which ultimately results in changes to the stability of certain markets. In addition, speculative market demand can also have an influence on the value of a country’s currency.
An example of this is speculation about Britain’s exit from the European Union in 2016. This event had an impact on fluctuations in currency values in several countries such as GBP, USD and also Yuan.
Where at that time there was no certainty whether Britain would actually leave and remain part of the European Union. This condition of uncertainty ultimately causes all forms of action to be considered speculative in nature.
The existence of a revaluation policy is for the economic interests of a country but in the long term. When the value of the local currency is stable over a long period of time, this can give a sign that the economic growth in a country is getting better.
Moreover, if the trade balance can be said to be in surplus or deficit, it will also have an impact on the value of the local currency. Even so, there are also effects due to the revaluation policy, especially for business people.
Where the revaluation policy will have an impact on competitiveness and profits for domestic entrepreneurs who carry out export-import activities. With the revaluation will make the price of local goods cheaper in the international market.
This condition will also put pressure on local business actors to increase productivity, carry out greater promotion of goods so they can be more competitive in the international market and also reduce the price of goods.
Like devaluation, revaluation also has its own impact. Where later the revaluation policy can help the country’s economic interests in the long term or the long term.
Simply put, the revaluation policy will be able to make the value of the local currency in a fairly stable position for quite a long time. Where the condition of a fairly stable currency value can be a sign that a country’s economic growth is getting better.
Even so, the revaluation policy can also have an unfavorable impact on business actors’ competitiveness and the benefits gained when carrying out export-import activities.
The revaluation policy will make local product prices more affordable in the international market. If this happens, it will put pressure on local entrepreneurs in several aspects. Starting from increasing productivity, promoting greater goods in order to compete in the international market and lowering the price of products sold.
Well, that’s a review related to devaluation and revaluation. Where both policies will have a significant influence on a country’s economic conditions. Hopefully all the discussion above can add to your insight.
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Author: Hendrik Nuryanto