ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Devaluation is reduction in value of domestic currency by the government under fixed exchange rate system.It is a deliberate effort. On the other hand, Depreciation is decrease in value of domestic currency due to market forces of demand and supply under flexible exchange rate system.

Detailed explanation-2: -On the one hand, devaluation happens when a government makes monetary policy to reduce a currency’s value; on the other hand, depreciation happens as a result of supply and demand in a free foreign exchange market. Devaluation is a decision that makes a currency lose value.

Detailed explanation-3: -Currency depreciation is a fall in the value of a currency in terms of its exchange rate versus other currencies. Currency depreciation can occur due to factors such as economic fundamentals, interest rate differentials, political instability, or risk aversion among investors.

Detailed explanation-4: -Thus, depreciation of a currency tends to increase a country’s balance of trade (exports minus imports) by improving the competitiveness of domestic goods in foreign markets while making foreign goods less competitive in the domestic market by becoming more expensive.

Detailed explanation-5: -However, both devaluation and depreciation lead to a fall in the value of the domestic currency in relation to the foreign currency. Consequently, domestic goods become cheaper in terms of foreign currency. Accordingly, exports tend to rise (while imports are discouraged).