Devaluation and Depreciation Definition

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Definition of devaluation and depreciation

  • A devaluation occurs when a country makes a conscious decision to lower its exchange rate in a fixed or semi-fixed exchange rate.
  • A depreciation is when there is a fall in the value of a currency in a floating exchange rate.

In general, everyday use, devaluation and depreciation are often used interchangeably. They both have the same effect – a fall in the value of the currency which makes imports more expensive, and exports more competitive.

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In 2008, the Pound Sterling fell in value by 30%. The correct term is a depreciation because the Pound Sterling was a floating currency. (no fixed exchange rate.)

  • For A-Level economics, it is not absolutely essential to distinguish between the two, but there is a distinct technical difference and using them correctly is good practice.
  • Essentially devaluation is changing the value of a currency in a fixed exchange rate. A depreciation is reducing the value in a floating exchange rate.

Definition of Devaluation

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Sterling exchange rate index, which shows the value of Sterling against a basket of currencies. In 1992, The Pound devalued after exiting the Exchange Rate Mechanism.

A devaluation is when a country makes a conscious decision to lower its exchange rate in a fixed or semi-fixed exchange rate. Therefore, technically a devaluation is only possible if a country is a member of some fixed exchange rate policy.

  • For example in the late 1980s, the UK joined the Exchange Rate Mechanism ERM. Initially, the value of the Pound was set between say 3DM and 3.2DM.
  • However, if the government thought that was too high, they could make the decision to devalue and change the target exchange rate to 2.7DM and 2.9DM. In 1992, they left ERM as they couldn’t maintain the value of Pound.

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Reasons for Youth Unemployment

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A look at the economics reasons for high youth unemployment (16-25) in many western economies.
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In the UK, youth unemployment has averaged higher than the main unemployment rate. This is is a similar situation to the US and European economies.

The reasons for youth unemployment include

  1. Lack of qualifications. Young people without any skills are much more likely to be unemployed (structural unemployment) A report by Centre for Cities suggest there is a correlation between youth unemployment and poor GCSE results in Maths and English. To some extent, the service sector has offered more unskilled jobs such as bar work, supermarket checkout and waiters. However, the nature of the labour market is that many young people lack the necessary skills and training to impress employers.
  2. Geographical Unemployment. Youth unemployment is often focused in certain areas – often inner cities where there is a cycle of low achievement and low expectations. For example, the employment rate for 16-24 year-olds is only 64% in the North East compared to a national average of 70%

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Currency Speculation and Exchange Rate

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Readers Question: Hi! Can you explain why floating exchange rates reduce the risks of currency speculation? What are those risks? Thank you very much! Currency speculation is when investors feel the exchange rate is wrongly valued and so buy/sell currency in the hope of making a profit. For example, if a currency is pegged at …

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Causes of resource scarcity

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Resource scarcity is defined as a situation where demand for a natural resource is exceeding the supply – leading to a decline in available resources. When we talk about scarce resources, we usually imply that current use is unsustainable in the long-term. Scarcity can involve non-renewable resources, such as oil, precious metals and helium. It …

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The True Level of Unemployment in UK

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Readers Question: To what extent do the official UK figures for unemployment accurately reflect economic reality? The unemployment rate measures those who are officially seeking work but unable to find employment. However, the official unemployment rate does not include those who are not working and are classed as economically inactive. For example, economically inactive can …

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Government debt under labour 1997-2010

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Government debt under Labour was a major factor in the elections of 2010 and 2015. But to what extent did the Labour government really plunge the economy into debt during 1997-2007?

Usually, when people say ‘it’s debt that got us into this mess’. They tend to view all types of debt as the same – equating government debt to financial debt incurred from selling sub-prime mortgages in the US. However, this is deeply misleading. The consequence of bad debt defaults in the financial system is very different to government debt financed through selling bonds.

Government debt

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In 1997, public sector debt as % of GDP:

  • 1997/98 – 40.4% of GDP
  • 2007/08 – 36.4% of GDP
  • 2010/11 – 60.0% of GDP.
  • May 2019 – 82.9% of GDP

At the start of the great recession in 2007, public sector debt had fallen from 40.4% of GDP to 36.4% of GDP. This was despite increased real government spending. After the start of the crisis, public sector debt almost doubled in the space of three years.

If we look at just actual government debt, there is a significant increase.

In 1997, the total public sector debt was:

  • 1997/98 – £352 bn
  • 2007/08 – £527 bn
  • 2010/11 – £902 bn

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Debt to GDP statistics were helped by the period of strong economic growth – a reminder that economic growth is as important at debt levels. It is also worth bearing in mind UK public sector debt in comparison to the post-war period.

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Some misconceptions about how the economy works

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What are some of the biggest misconceptions about how the economy works? Some misconceptions Economists can make reliable forecasts. Presidents control the economy – Policies of government only partially responsible for economic activity. Luddite fallacy. – Misconception that new technology destroys jobs. Broken window fallacy – Misconception paying for damage creates economic activity. The lump …

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Advantages of Capitalism

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Readers Question: What are the advantages of capitalism? Capitalism is an economy based on free markets where resources and firms are privately owned. In practice, this usually involves some state intervention to protect private property and regulate certain aspects of the economy. Most would argue that the UK and US is essentially capitalist despite the …

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