Depreciation and devaluation are economic terms often used interchangeably but are actually quite different. While both relate to the value of a country's currency, each has its own causes, advantages and disadvantages. Many countries use these economic mechanisms to improve areas such as trade and demand for goods, though using depreciation or devaluation carries economic risks.
Definition of Devaluation
According to the Economics Help website, devaluation occurs when a country purposefully lowers the value of its currency as it applies to its exchange rate with currencies from other countries around the world. A country may do this for a number of reasons, like lowering the exchange rate to stimulate travel from foreign nations or to encourage more countries to import goods from it. A country must participate in some type of fixed exchange rate policy, like buying and selling its own currency, to control the value of its currency for exchange rate purposes.
The Meaning of Depreciation
Depreciation is the decline in a value of a currency based on market factors like supply and demand. For example, if consumers (as well as countries) who normally use the dollar to conduct business begin to trade or buy and sell using another currency, the dollar's value may slide in value in comparison to the other currency. Depreciation can fluctuate wildly depending on the economic conditions in a given country and whether or not the country has strong exports, tourism or even stability in its government.
Who's in Control?
The government of a country is in total control of currency devaluation. It is a calculated fiscal move to control the value of money and keep certain economic conditions in place. Depreciation, however is totally in the hands of the market and is not so easily controlled. The sliding value of a currency can happen gradually, over months or a year, or it can occur suddenly within the span of a few days or weeks.
Advantages and Disadvantages
Devaluation of currency has several advantages, such as allowing a country to keep competing in the foreign trade market, increase exports to other countries and increase economic growth through greater demand of domestically made products. Devaluation also has a downside in that it increases the price of imports and may lead to inflation. Depreciation can actually make goods exported in the depreciated currency less expense for other countries to import. This can lead to an increase in exports, which over time can help the currency recover its value.
