When a country devalues its currency, it makes its products cheaper for foreign buyers. It’s a way to increase exports and improve the country’s balance of trade (exports minus imports). But devaluation also increases the cost of imported goods for citizens, which can strain supply chains. Understanding how and why this happens can help businesses plan for the impacts on their customers and suppliers.
Historically, early currencies were coins made from precious metals such as gold or silver, but once these became scarce, governments began issuing paper money that was backed by the national wealth stored in the central bank. These paper notes were called fiduciary media and derived their value from the amount of national wealth they represented. If the government printed too much of this media and it lost value, they would decrease its worth by decreasing the weight or purity of the precious metal backing it (devaluing the currency).
Today, most countries no longer peg their currencies to precious metals; instead they float in international exchange markets. Devaluation alters the value of a currency relative to others, which can affect global trade balances and import costs and can have an impact on international investments. However, devaluation can lead to inflation and reduced purchasing power for citizens, which can undermine economic growth. Understanding the dynamics of currency devaluation is important for businesses and investors aiming to maintain competitive pricing and secure their market position amidst changing economic conditions.