Question

distinguish between devaluation and depreciation of domestic currency​

Answer 1

Answer:

Definition of devaluation and depreciation

A devaluation occurs when a country makes a conscious decision to lower its exchange rate in a fixed or semi-fixed exchange rate.

A depreciation is when there is a fall in the value of a currency in a floating exchange rate.

In general, everyday use, devaluation and depreciation are often used interchangeably. They both have the same effect – a fall in the value of the currency which makes imports more expensive, and exports more competitive.

In 2008, the Pound Sterling fell in value by 30%. The correct term is a depreciation because the Pound Sterling was a floating currency. (no fixed exchange rate.)

For A-Level economics, it is not absolutely essential to distinguish between the two, but there is a distinct technical difference and using them correctly is good practice.

Essentially devaluation is changing the value of a currency in a fixed exchange rate. A depreciation is reducing the value in a floating exchange rate.