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The Difference Between Devaluation and Depreciation, Let's Understand!

Devaluation is defined as a deliberate decrease in the value of money against foreign currency or against gold to improve the economy.

The Difference Between Devaluation and Depreciation, Let's Understand!

The value of the currency in each country is undoubtedly not always stable. Sometimes, the value of a currency can increase or decrease quite drastically compared to other countries currencies.

This decrease in the value of a currency is referred to as a devaluation, but it can also be called depreciation. Even though they have the same meaning, they are very different.

According to the Big Dictionary, Devaluation is defined as a deliberate decrease in the value of money against foreign money or against gold with the aim of improving the economy. Meanwhile, Depression means a decrease or depreciation in value (currency) that occurs not because of a decision by state authorities.

Reporting from the credit simulation, here are a number of differences between devaluation and depreciation that you need to know. 

1. The reason for the occurrence of

currency devaluation occurs because of a decision made by the government to reduce the value of its country's currency for certain reasons and purposes, for example, to increase the value of exports.

On the other hand, depreciation occurs not because of a decision made by the government but because of high demand and supply in the currency market. In order to strengthen the value of the country's currency, the government will intervene to restore the value of the currency.

2. Currency exchange system

Devaluation occurs in countries that use a fixed exchange rate. The monetary authority (central bank) of the country that uses this system will set the value of its currency against certain foreign currencies. The central bank will be tasked with maintaining foreign exchange reserves by buying or selling its own currency in the foreign exchange market.

The goal is to keep the value of the national currency within a very narrow range and not allow it to float against other currencies. Therefore, the central bank can reduce the value of its currency at any time.

An example of a fixed exchange rate is the rupiah currency is fixed against the US dollar (USD).

Meanwhile, depreciation occurs in countries that use a floating exchange rate system (real effective exchange rate). Most countries in the world generally use a floating exchange system.

The currency market determines the value of a currency with a floating exchange rate system. Its value depends on a particular foreign currency's supply and demand forces.

3. Impacts on foreign trade and the domestic economy

Both devaluation and depreciation have an impact on the domestic economy, such as:

Devaluation

  • Increasing the value of exports
  • Reducing the volume of imports
  • Domestic products are increasingly competitive
  • Increasing the country's foreign exchange

Depreciation

Priceimported goods are more expensive while the prices of exported goods are lower, assuming that changes in the volume of exports and imports change slowly. This will lead to a larger trade deficit or a decreased trade surplus.

4. The validity period of the economy

The period of currency devaluation is actually concise. Even so, devaluation is considered capable of solving economic problems in a country.

Meanwhile, depreciation tends to take longer. This happens because depreciation is beyond the control of the government, so it is more difficult to control. Therefore, depreciation has long-term effects.

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