How does Currency devaluation work?
Answer:
Devaluation is a reduction in the value of a currency with respect to other monetary units. In common modern usage, it specifically implies an official lowering of the value of a country's currency within a fixed exchange rate system, by which the monetary authority formally sets a new fixed rate with respect to a foreign reference currency. In contrast, (currency) depreciation is most often used for the unofficial decrease in the exchange rate in a floating exchange rate system. The opposite of devaluation is called revaluation.
Depreciation and devaluation are sometimes used interchangeably, but they always refer to values in terms of other currencies. Inflation, on the other hand, refers to the value of the currency in goods and services (related to its purchasing power).
So lets say that a country's money, the PUNAR has an exchange rate of 100 PUNARS per Dollar. ach is worth a penny to us. If they run up a lot debt, and now owe $1Billion PUNARS for their purchases, the country may choose to relieve the debt by revaluing the currency, say 1000 PUNARS per dollar. Now they only owe $100 Million. By doing this, the purchasing power of their money buys less for their people. A person still only has a fixed amount of PUNARS and they buy less overnight.
As a result, people try to sell their PUNARS before the government does it again, opting to a stable currency, like dollars or Euros or gold. This destabilizes the money and the confidence in the government, and to people that purchase things there.
See wikipoedia
Countrys like china devalue their currency to encourage forign consumers to buy their products. The exchange rate is fixed to make their products very cheap to the US. This extreme inbalance has created the worlds fastest growing economy. However, for the same reason it remains one of the poorest country. In time, when their economy is stronger, they will revalue their currency, and emerge as a major world indrustrial + economic power.
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