Depreciation vs. Devaluation of Currency

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Depreciation vs. Devaluation of Currency
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The devaluation and deprecation of currency go more or less hand in hand. Currency depreciation is an economic result, whereas devaluing a currency is an act that results in currency depreciation. Understanding both of these concepts will help to understand foreign currency exchange as well as how political events have and can influence the value of currency.

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Depreciation of Currency

When a currency depreciates, this means that the currency has decreased in value when compared to another nation’s currency.

Example of Depreciation

If you were able to get £1 for every £1.30 on one day, then the next day you can get £1.5 for every £1.30, the value of the £ has decreased. This decrease is known as depreciation. To look at it another way; if country A's currency was equal to the currency of county Z, you would be able to get a one-to-one exchange of each of the currencies. The next day you attempt to trade 60p of country A’s currency, and you only get $.50 of country Z’s currency in return; hence, country A’s currency has depreciated. It is now worth only half of the amount it was before in relation to country Z's currency.

Devaluation of Currency

Devaluation of currency is an active economic strategy. It is sometimes used when countries are badly in debt. This occurs when a country lowers the official value of its currency in relation to foreign currencies. This is intended to raise the price of imported goods and increase the value of the country's exported goods. This can be a risky economic move because it can spark hyperinflation.

History of Devaluation

The most notable historical case of currency devaluation is the devaluation of the Deutschmark in the 1920s. After reparations payments were required to be paid to the allies of WWI by Germany, the German government suddenly faced a huge onset of debt. The Germans decided to devalue the currency by printing excess marks to pay the debt. This sparked hyperinflation that caused the mark to be nearly worthless in Germany. Some historians argue that this economic burden was one of the gateway causes to WWII.

Devaluation and Depreciation

Both of these concepts involve international economics and foreign exchange trading. Devaluation is a result of natural changes within the world economy. Devaluation can occur because of several different circumstances. These circumstances also might not necessarily be the fault of the country whose currency was devalued. Other countries' currencies can get stronger which results in a devaluing domestic currency. Currency depreciation is an active economic move with the desired result being devaluation of currency on the foreign exchange market.

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