Devaluation: what is it in simple words?
Until recently, no one knew about this term. In our country, people didn’t even know what devaluation or deflation was. When these words first appeared in our speech, many residents of Ukraine could not have imagined that they would indicate the financial well-being of the population. Currently, despite the fact that the words remain in everyone’s ears, very few people know their definition. Of course, devaluation can cause serious damage to the country’s economy. Let’s take a look and find out the definition of these economic terms. Let’s start with the devaluation, meaning, and general description.
The depreciation of the national currency relative to others is called devaluation. For example, if the dollar or euro exchange rate has risen sharply against the hryvnia, then you should be prepared for the depreciation of the latter. If earlier for a certain amount of money you could buy 2 computers, now for this cost you can buy only 1 laptop. This indicates that your salary has a lower value than before.
There is the following classification of this economic process:
- official version,
- controlled area,
The first type is depreciation, which is recognized by the state. The Government is taking measures to counteract this process. The National Bank of Ukraine openly declares that the currency is losing its value and will soon be withdrawn from circulation.
Hidden devaluation is, in simple terms, money that has fallen in price and is gradually being withdrawn from circulation. This process occurs unnoticed, so the local population may not even notice it.
Controlled devaluation refers to the economic process when the National Bank tries to slow it down and keep it within a certain range.
Uncontrolled devaluation means the depreciation of money that is out of the control of the state. Decisions that were taken by the government of the country do not bring the proper effect. It is worth noting that this type is considered the most common.
Reasons for devaluation in simple words
To finally understand this term, you need to understand what its prerequisites are. What caused this process to occur? Often, the devaluation occurs as a result of the influence of various macroeconomic factors, for example::
- payment deficit,
- low trade balance,
- high inflation.
Devaluation also occurs in those countries where the country’s economy has been severely weakened due to various crises, civil wars, natural disasters, etc.
Positive and negative aspects
Like any other economic process, devaluation has its advantages and disadvantages. Of course, you should understand that it can entail a lot of risks that will affect the economy.
The country may lose its business reputation, which means that it will be much more difficult to attract foreign partners. The consequences of devaluation can be quite different, including a reduction in the amount of social benefits, loss of confidence in the hryvnia, a reduction in imports, etc.
Often, a frequent companion of this economic process is inflation, that is, the cost of consumer products increases. People massively transfer their savings into foreign currencies, which, in their opinion, seem more stable.
There are also positive aspects to the devaluation. With its help, you can improve the country’s balance of payments, earn money from currency transactions, and reduce the consumption of gold and foreign exchange reserves. The demand for domestic products and goods is increasing in the country.
Who benefits from devaluation?
First of all, this process provides an opportunity to improve the country’s budget. Also, businessmen who export their manufactured goods abroad get a good profit. The income of Ukrainian producers increases, because due to low earnings, the population is forced to give preference to domestic products. Also, travel companies that organize tours around Ukraine are beginning to enjoy great popularity. Due to the devaluation, only wealthy people can buy vouchers abroad.
Devaluation what is it in simple words and how to save your money for ordinary citizens?
If you want to save your accumulated funds, then the best option is to buy a liquid product that can be sold in the future and earn income. The most profitable financial investment is the acquisition of movable and immovable property.
You need to determine the products that you can sell more expensive in case of devaluation. Such valuable goods include precious metals, electronics, and household appliances.
Many citizens run to exchange offices and banks during the devaluation to exchange currency. It is worth noting that in such a difficult time, foreign currency is sold at a higher rate, so by exchanging hryvnia for euros or dollars, you risk losing a significant amount.