√ Definition of Devaluation, Objectives, Factors, Impacts and Examples
Definition of Devaluation, Objectives, Factors, Impacts and Examples – In this discussion we will explain Devaluation. Which includes definitions, objectives, factors, impacts, examples and ways to deal with devaluation with a complete and easy-to-understand discussion.
Definition of Devaluation, Objectives, Factors, Impacts and Examples
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Definition of Devaluation
Devaluation is a decrease in the value of the domestic currency against foreign currencies. When this happens, the government will often intervene to stabilize the value of the domestic currency.
The use of the term devaluation is usually related to the decrease in the value of a country's currency in the value of a foreign currency. Devaluation also leads to government policies. Or in short, the notion of devaluation is a condition in which the local currency has a cheaper exchange rate or price internationally.
Purpose of Currency Devaluation
Some of the objectives of implementing a currency devaluation by the government, namely:
- To increase exports and reduce the number of imports. This is in order to improve the Balance of Payment.
- To increase the use of domestic production. This can be achieved if imported goods are more expensive than local goods.
- The achievement of an equilibrium Balance of Payments, making foreign currency exchange rates more stable.
Factors Causing Devaluation
Devaluation is heavily influenced by people's behavior and an important factor causing the devaluation is import activity. The high volume of imports of goods from abroad, especially if it is not matched by comparable export activities will result in higher demand for conversion of local currency values into foreign currencies, such as from rupiah to dollars.
If the demand is higher, then the buying rate against the dollar will rise and the value of the rupiah will decrease which will also have an impact on inflation.
Therefore, the devaluation policy was issued by the government as a form of resolving devaluation and stabilizing a country's economy. The following are some of the causes of currency devaluation in a country, including:
- High import activity (staple goods, electronics, food and other necessities)
- Export activities are only for food and marine biota.
- The level of unemployment in a country
Impact of Devaluation
The impact of the devaluation, among others, namely:
Reduced Import Volume
Devaluation makes the price of foreign goods expensive, making it more difficult and burdensome for people to buy them. This will increasingly change the mindset of people to buy domestic goods to reduce the volume of imports.
On the other hand, the use of local goods will be higher which will affect the per capita income of a country.
Increasing Export Volume
If the value of the local currency is low in the international world, then the price of local goods will be considered cheap by foreigners. This will be a driving force for demand for goods from overseas people so that export volumes can increase.
Increased exports can increase the amount of circulation of foreign currency such as dollars in a country so that it can improve the position of BOP (balance of payment) and BOT (balance of trade).
Local Goods Increasingly Competitive
The state of devaluation can be one of the things that triggers local entrepreneurs to compete in international markets. Local goods to be marketed to overseas communities will increase.
Even the prices of local goods that are felt to be cheap abroad change the mindset of foreign people to make them more choose cheap imported goods over local goods in their country which have a greater tendency expensive. And also because it will make local entrepreneurs abroad lower their prices.
Increase in Foreign Exchange
The imbalance between export-import activities where the volume of exports is higher than the volume of imports will make profits in international trade make a lot of foreign exchange reserves
Furthermore, the foreign exchange reserves can be used for development or establishing a company that can provide employment to reduce unemployment.
Examples of Devaluation in Indonesia
There are several examples of cases of devaluation that the Indonesian state experienced, including:
August 21, 1971
During the reign of President Soeharto (New Order) through Minister of Finance Ali Wardhana. On August 15, 1971, the United States had to stop trading dollars for gold.
President Richard Nixon was worried about the depletion of the United States' gold reserves if the dollar was allowed to continue with gold, while the current value of US $ 34.00 could buy 1 ounce of gold.
Suharto could not resist the consequences of Nixon's move and on August 21, 1971, Indonesia devalued the Rupiah from Rp.378.00 to Rp.415.00 per 1 US$.
November 15, 1978
During the reign of President Soeharto through Minister of Finance Ali Wardhana. Even though Indonesia had benefited from the increase in oil prices as a result of the 1973 Arab-Israeli War, Pertamina actually nearly went bankrupt with a debt of US $ 10 billion and Ibnu Sutowo resigned as the main director at 1976. Then on November 15, 1978 the rupiah was devalued from Rp.415.00 to Rp.625.00 per 1 US$.
March 30, 1983
During the Government of President Soeharto through the Minister of Finance Radius Prawiro. At that time, Minister of Finance Radius Prawiro devalued the rupiah by 48%, so it was almost the same as cutting the value in half. The exchange rate for 1 US dollar rose from IDR 792.50 to IDR 970.00.
Sept. 12, 1986
The reign of President Soeharta through Minister of Finance Radius Prawiro. On September 12, 1986 Minister Radius Prawiro made another 47% devaluation from IDR 1,134.00 to IDR 1,664.00 per US dollar.
Thus has been explained about Definition of Devaluation, Objectives, Factors, Impacts and Examples, hopefully can add to your insight and knowledge. Thank you for visiting and don't forget to read other articles.
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