What is the difference between devaluation and depreciation of a currency?
2 Answers | Add Yours
Both currency depreciation and currency devaluation end up with a currency that is worth less than it previously was in comparison to the currencies of other countries. The difference is in how the currency comes to be worth less.
Depreciation occurs only in countries that allow their exchange rates to float. That is, these countries allow supply and demand to determine the value of their currency relative to the currencies of other countries. Depreciation occurs when the forces of supply and demand cause the value of their currency to drop.
By contrast, devaluation occurs only in countries that do not allow their exchange rates to float. These countries’ governments control the official value of their currency. They typically use government money to buy or sell currency so as to keep the exchange rate where the government wants it to be. Devaluation occurs when a government decides that it needs to have its currency be worth less. It then allows its currency to become weaker.
In general, depreciation is considered to be a better thing because it happens “naturally” where devaluation is artificial.
Both the terms devaluation and depreciation refer to the present value of a country's money. One of the terms--devaluation--refers to a change in value of a money that has its value set by the country's government: its value does not "float" on the open international monetary market. The other term--depreciation--refers to a change in value of a money that has its value determined by market forces generated in the open money market: its value is not determined by what its government fixes its value to be but by market forces and buy-sell rates.
Money is devalued when a government lowers--devalues--the worth, or value, of its currency. Money depreciates when the money market--the currency exchange market--is willing to only pay less than before for a specific country's currency.
The difference between the two is who or what is allowed to change the value of a currency: (1) the government (because it retains the right to fix its currency value) or the free market forces (because a government decides to float its currency in the international free market money exchange).
When you look at the devaluation of currency you are looking at the worth of one country's currency as the government of that country sets the value to be.
When you look at the depreciation of currency you are looking at the worth of a country's currency in the international monetary exchange market.
Join to answer this question
Join a community of thousands of dedicated teachers and students.Join eNotes