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What is the difference between devaluation and depreciation of a currency?

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kimoyo | Student, Undergraduate | (Level 1) Salutatorian

Posted September 1, 2013 at 6:58 AM via web

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What is the difference between devaluation and depreciation of a currency?

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted September 1, 2013 at 1:56 PM (Answer #1)

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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. 

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