DEVALUATION

reduction in the exchange value of a country's monetary unit in terms of gold, silver, or foreign monetary units. Devaluation is employed to eliminate persistent balance-of-payments deficits, because devaluation has the effect of decreasing prices of the home country's exports in terms of the importer's currency and, at the same time, increasing prices of imports to home country buyers. If the demand for both exports and imports is relatively elastic (if the quantity purchased is more than proportionately responsive to changes in price), the nation's income from exports will rise, and its expenditure for imports will fall. Thus, its trade will be more in balance and its balance of payments improved. An additional benefit may arise if the increase in exports results in a general expansion of the economy with an increase in the interest rate unaccompanied by an expansionary monetary policy. In that case, capital inflows will increase and outflows decrease. Devaluation will not be effective if the balance-of-payments disequilibrium is a result of basic structural faults in a nation's economy. Revaluation, on the other hand, involves an increase in the exchange value of a country's monetary unit in terms of gold, silver, or foreign monetary units. It may be undertaken when a country's currency has been undervalued in comparison with others, causing persistent balance-of-payments surpluses.