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Devaluation – what is it: good or bad

Devaluation – what is it: good or bad

Devaluation is a decrease in the value of the national monetary unit in relation to other currencies participating in the global financial system.

For example.

Today, the cost of one American dollar is 70 rubles. Tomorrow it became 80 rubles. In this case, they say so - there was a devaluation of the national currency (ruble) against the dollar, i.e. the ruble depreciated against a foreign currency.

Naturally, in relation to other currencies (EUR, CNY, BLR, CHF, etc.), on the basis of cross-rates, and taking into account the structure of the currency basket embedded in the system of exchange rate formation of the state, its value is also recalculated.

If the ratio of 1 EUR to 1 $ on the world market is 1.1, then with the devaluation of the ruble to $ (as in our example), EUR will also increase in price by 1.1 (there was a cost of 1 EUR 70 * 1.1 = 77, and it will become 80 * 1.1 = 88). According to this principle, when the national monetary unit devalues to one currency, its value also changes to others.

But here comes the question: - And the fact that it has depreciated against other currencies is good or bad?

Here it is important to understand for whom it is good and for whom it is bad. 

The essence of devaluation is what it solves!

Devaluation is the most important lever in managing the economy of almost any state, provided that its turnover depends on imports and exports, i.e. foreign markets.

In order to grasp its essence in more detail and understand how it affects the economy of the state, we will give a simple example of an economic model of a certain virtual state before and after devaluation.

devaluation is: good or bad for example - 1

In this state, the total amount of national wealth of goods and services produced by its business (real sector) 100 billion rubles.

The business produces this volume of products/services, thereby supporting its employees, providing them with a happy life, at the expense of wages, for which they can buy everything and in sufficient quantity (goods / services of their own production - on the domestic market and foreign - import).

This condition is met despite the fact that 50% of all produced is sold domestically, and the rest is sold to foreign markets (export). At the same time, the exchange rate of foreign currency (in this case, we consider the dollar) is 2 rubles for $ 1. With such a ratio of currencies, the foreign market is ready to absorb national surpluses in such a volume, i.e. 50% of the total national output.

All the proceeds from the sale of 100 billion rubles provide the state budget with tax revenues, which are enough for the maintenance of the public sector. Deficit-free activity is supported.

That is, the main state mission is being fulfilled – the people are happy (the proletariat and state employees).

But life is going on and various changes are taking place in foreign markets.

For example, there are competitors who are ready to supply similar goods for no more than 25 billion.$ in the same amount (as our state offers), but for $ 20 billion.

Naturally, under these circumstances, the foreign market will prefer a cheaper product and in this case will refuse goods with a total value of $ 25 billion.

In total, we get that the state is deprived of volumes of 50% of the national wealth. I.e., it will produce something, but sell it?

Naturally, the real sector comes under attack. The activity will move to unprofitable plane– revenue will not be enough to cover part of the production costs. The way out is to reduce costs, including reducing people.

A similar situation will develop for state employees, because the volume of tax revenues will decrease.

That is, the mission of the state is no longer being fulfilled, people are not as happy as before.

devaluation - what is it: good or bad for example - 2

The solution of the issue can be achieved in two ways:

  • increase production volumes and, due to the economies of scale, get a competitive price in order to resist competition and maintain volumes. But in this case, there will also be additional surpluses of goods/services. And where are they going ?
  • devaluation
    Devaluing the exchange rate of the national currency to 2.5 rubles for $ 1, the state will save revenue, slightly adjusting the profitability of the real sector, if the share of imports in production was insignificant. Personal needs for imported goods for people will be met, but at a higher price. But with all this, the production potential and budget revenues will remain. The State's mission continues to be fulfilled. .

devaluation is: good or bad for example - 3

this is important

Therefore, it is important to understand that devaluation is good from the point of view of national interests, not someone's personal ones.

If devaluation will not be carried out in this case, it will suffer most of the population. And this is contrary to the state interests.

Of course, devaluation may be bad for the state economy, if, for example, the total volume of imports is higher than exports in the main manufacturing sector and there are significant debt obligations of the country in foreign currency.

Devaluation is not an easy decision for the monetary authorities, because one thing affects the other, and it is always necessary to take into account this multifactoriality, constantly assessing its impact on the economy of the real sector and the budget.

Sometimes artificial interventions are used to contain it, to maintain the exchange rate of the national currency at the expense of existing gold and foreign exchange reserves (gold reserves), if there are no long-term prerequisites for its implementation.

Devaluation – what is it: good or bad – Something like That!

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