Difference between denomination, devaluation, revaluation

Expert opinion

Demin Viktor Mikhailovich

Doctor of Pedagogical Sciences, Candidate of Economic Sciences, innovator, professor.

The increase in the value of the national currency is ambiguous.

Revaluation economic processes in the state are characterized by the following four main advantages:

• Decrease in inflation rates;
• Decrease in prices for goods and services in the country;
• The ability to buy foreign funds cheaper than before;
• Decrease in balance sheet growth rates.

There are several disadvantages to revaluing the national currency:

What is denomination, stagnation?

In simple terms, denomination is the act of replacing banknotes with new ones of a lower denomination.

For example, in 1997 in Russia, a banknote with a face value of 10,000 rubles was exchanged for a similar 10-ruble note. Redenomination is the reduction of the face value of banknotes in an attempt to simplify payments and improve government finances.

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After redenomination, old banknotes are usually used for a certain period of time and then gradually withdrawn from circulation. Upon expiration of the period announced by the government, old banknotes are completely destroyed.

Listed below are some of the main benefits of using national currency:

• Reduce the cost of issuing new banknotes,
• Significantly simplify calculations
• Reveal the hidden income of citizens when exchanging old banknotes for new banknotes.

A stagnating economy is characterized by stagnation in all aspects of the economy, including trade and manufacturing.

Typical signs of an economy in decline:

1. Long-term lack of economic growth With prolonged stagnation of production, goods become uncompetitive. Countries with healthy economies record annual production growth.
2. High level of unemployment of the population The deterioration of state production caused by stagnation seriously affects the monetary sphere and causes an increase in inflation. The latter, in turn, is accompanied by an outflow of foreign capital and a deterioration in the supply of enterprises.
3. Gradual decline in living standards The development of inflation and the reduction of industrial potential cause a gradual decline in living standards.

How prices change after redenomination in different years.
Economic stagnation can be divided into:

1. Monopolistic stagnation The lack of competition within a market economy leads to the disappearance of incentives for further development. Manufacturers cease to control the quality of products and can set any price for industrial products.
2. Transitional stagnation The transition from a planned economy to a market economy is accompanied by a process of transitional stagnation. This type of stagnation processes is much more dangerous than monopolistic processes, and can lead to a complete collapse of the economy.

Differences between devaluation and inflation and stagnation

Stagnation, inflation and devaluation refer to the destruction of the state's economy.

However, despite the external similarity and interconnection, these economic processes differ from each other to a certain extent.

Differences from inflation

The process by which a nation's currency depreciates in value relative to other currencies. A change in the purchasing power of a currency in the domestic market is called inflation.

Thus, public money becomes cheaper due to the nature of economic processes.

As a result of the devaluation on the international market, one Russian ruble can buy fewer dollars than before. Inflation increases when the same amount of money can buy fewer goods, both imported and domestic, over the course of a year.

Inflation and devaluation: is one possible without the other?

In advanced economies, devaluation is not necessarily accompanied by inflation.

In developing economies such as Russia, devaluation can lead to increased inflation.

Difference between devaluation and stagnation

The stagnant financial situation is accompanied by a deterioration in the economy and living standards. Of course, stagnation can lead to inflation and devaluation of the state currency.

Devaluation refers to a decrease in the value of government financial instruments.

The concepts of devaluation and stagnation are fundamentally different, and different economic factors are involved in them.

Comments: 13

Your comment (question) If you have questions about this article, you can tell us. Our team consists of only experienced experts and specialists with specialized education. We will try to help you in this topic:

Author of the article Irina Rusanova

Consultant, author Popovich Anna

Financial author Olga Pikhotskaya

1. Raisa
   10/22/2020 at 1:59 pm I’m taking out a mortgage for a home, how will devaluation affect the payment?
   Reply ↓ Anna Popovich
   10/22/2020 at 15:02

   Dear Raisa, mortgage lending involves the most common risks, including currency devaluation.

   Reply ↓

What do devaluation, revaluation, and denomination have in common?

Those characteristics that influence the economic processes of the state are the main characteristics that connect these three concepts.

How much is new money worth in relation to old?

Devaluation promotes the export of domestic products, but at the same time increases external debts and increases imports. As a result, devaluation stimulates production growth and forces the government to invest in previously unprofitable industries.

Revaluation is the other side of devaluation. When the value of the national currency increases, the price of imported goods decreases, but at the same time exports decrease. Exchange rate revaluation reduces investment and stimulates capital flows.

This is an independent economic process, as a result of which the denomination of banknotes and coins decreases.

Differences between revaluation and denomination

As stated earlier, denomination and revaluation are two separate economic processes.

It is also difficult to say what the difference is between devaluation and redenomination, since these concepts are different.

Differences from devaluation

Devaluation is a decrease in the relative value of money of a particular state. Revaluation refers to an increase in its value.

By revaluing its currency, the country imports more goods and invests in foreign businesses.

What do devaluation and revaluation have in common?

None of these processes can occur without an impact on the national currency.

When money depreciates, its price falls; when money is revalued, its price increases.

Main reasons

There is no need to strengthen the ruble under normal market conditions. Most often, it is initiated by the state after a careful and balanced calculation of all consequences. The main reason for the revaluation is increased inflationary pressure. This is followed by a depreciation of the national currency and, as a result, the cost of goods and services increases.

The second reason is that it is necessary to increase the share of imports and increase foreign capital and investment. The strengthening of the national currency also promotes investment. A positive consequence of revaluation in this case is a reduction in inflation. Further, the rate of growth in prices for goods and services decreases, and the purchasing power of the population increases.

Nullification

Through nullification, banknotes are abolished.

Typically, nullification is carried out in countries where there is high inflation. As banknotes and coins lose their value, the government decides to nullify them, that is, to abolish them.

An example is Belarus, which in 2015 stopped issuing 50-ruble banknotes. These banknotes were no longer exchanged and were completely eliminated by 2016.

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Sometimes currencies are reset to completely replace old currencies with new ones. For example, when the Soviet Union collapsed, all fifteen independent states reset their currencies and issued their own national banknotes.

What does the devaluation of the national currency lead to?

The devaluation of the national currency leads to an increase in the competitiveness of domestic products in international markets.

If, for example, the value of the Russian ruble decreases, the state will benefit:

• Increasing exports to foreign countries;
• Increasing industrial potential;
• Reduced competitiveness of imported products.

Currency devaluation also negatively impacts the price of foreign goods such as computers and mobile phones.

As it was in 2016.

Ruble devaluation

The main reasons for the devaluation of the ruble, which we observe from time to time, is the uneven development of inflation in different countries of the world (as a rule, we focus on European countries and the United States in this matter), which leads to the emergence of a balance of payments deficit. Despite the fact that the main factors influencing the devaluation of the ruble are macroeconomic, it is the regulatory authorities in our country who make the decision to depreciate the national currency. The refusal to maintain the ruble exchange rate at a certain level is motivated by the need to reduce the level of the country's balance of payments deficit. Only in this way does the country have the opportunity to stimulate domestic production and increase the competitiveness of its products within the country and abroad.

The refusal to maintain the ruble exchange rate at a certain level is motivated by the need to reduce the level of the country's balance of payments deficit.

Examples in Russia

Three times the national currency of Russia was subjected to serious devaluation:

1. In 1998: Default and deteriorating economic conditions caused the collapse of the Russian currency.
2. In 2008: The depreciation of the ruble was due to the government's desire to attract as much foreign capital as possible.
3. In 2014: The deterioration of the ruble is due to the transition of the economy into a period of stagnation. Inflation in 2014 was primarily due to the new economic and foreign policy situation.

2016 was a somewhat disastrous year for the ruble:

• Sanctions from world economies
• Termination of trade relations with certain partners.

Revaluation for investors

In Russia, the process of revaluation did not occur suddenly and sharply. Therefore, if we take into account all the factors of macroeconomic relations, the investor will be able to determine the increase or decrease in the exchange rate. Thus, the risks of invested finances will be reduced to the maximum, and it will also be possible to increase capital.

To avoid possible risks, you should refrain from buying securities of countries with high inflation rates, as well as growing balance sheet deficits. It is always necessary to take into account currency fluctuations. For example, if the first signs of a strengthening of the exchange rate become noticeable, investors should transfer part of their assets from foreign currency to national currency. This will significantly increase the portfolio's profitability.

You can find more useful information by reading my “investment basics” section. If you couldn’t find answers to your questions in the article, write to me using the contacts listed on the site!

What is the denomination of national currency

Currency denomination refers to the exchange of one bill or coin for another of a lower denomination.

The best example of how denomination nullifies money later is Germany in 1923. The Bundeswehr government exchanged ten trillion Reichsmarks for new ones at that time.

Denomination: is it good or bad?

Currency denomination does not affect the standard of living of the country's residents under normal conditions. By taking this step, the country is not trying to increase the value of its currency, but rather to simplify mutual settlements and improve its economic situation.

For most denominations, the new and old currency are combined over a set period. Old banknotes are eventually thrown away by banks. It takes time for old bills to be replaced with new ones.

The governments of some countries consider denomination as a way to boost their economy at the expense of the population and entrepreneurs.

An interesting approach to evaluating other currencies in relation to the domestic one.

Denominational events are also accompanied by:

• Limiting the volume of exchange,
• Validity limit for old banknotes and coins,
• Requiring proof of origin of money.

In addition, a decrease in the nominal value of a currency is usually accompanied by an increase in inflation. Because the government prints additional notes, it takes money away from the public.

Why is revaluation carried out?

It is generally accepted that currency revaluation brings positive results for the economy of a country that is in crisis. In a stable economy, this process can also cause negative consequences.

The strengthening of the national currency is most often of a piecemeal nature. Thus, the strengthening of the ruble occurs due to the purchase of rubles on the market from the foreign exchange reserves of the Central Bank. But at the same time, this process can also be spontaneous.

For private investors, the revaluation of the national currency is a good opportunity to increase portfolio diversification. To do this, you need to invest money in foreign assets at reasonable prices. During this period, the most profitable solution would be to purchase securities denominated in dollars. You should also pay attention to gold. Due to this, it will be possible to make money on financial changes. At the same time, price growth will be stable.