Devaluation of the currency occurs when the value of the currency falls down in comparison to the dollar value. This impacts the economy at both macro and micro levels. It is important for the state to keep a stable performance at international markets so that that falling value of the currency doesn’t create serious problems for the economy. The damages that devaluation causes to the economy are:
How currency devaluation damages the economy?
- The rate of inflation rise and there will be a rise in prices of the imports. Not only this, the higher prices of raw material entering into the economy as imports can higher the prices of goods and services. This is obviously an unpleasant situation for people.
- Firms operating in the economy will be discouraged to do business because the devaluation of the currency will raise the cost of investment.
- The economy will experience a declining incentive of investment for firms and there will be slower economic growth.
- A great impact will be on the purchasing power of people. People will barely or not be able to buy goods and services. Eventually, the standard of living will fall.
- Devaluation also damages foreign investments as foreign investors will not see any profit in investing in a country having a weak currency.
- Consumers will be more dependent on debt instead of saving for the future.
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